Financial Attest Audit Report on the accounts of Economic Revitalization In Khyber Pakhtunkhwa & FATA (ERKF) Financed by World Bank, Grant No.TF-OA4251 Government of Khyber Pakhtunkhwa Industries Department For the Financial Year 2018-19 Auditor General of Pakistan Islamabad PART-II COVERING LETTER TO THE MANAGEMENT EXECUTIVE SUMMARY MANAGEMENT LETTER 1. Introduction 2. Audit Objectives 3. Audit Scope and Methodology 4. AUDIT FINDINGS AND RECOMMENDATIONS 4.1 Organization and Management 4.2 Financial Management 4.3 Procurement and Contract Management 4.4 Assets Management 4.5 Monitoring and Evaluation 4.6 Compliance with grants/loan covenants 4.7 Environment 4.8 Sustainability 4.9 Overall Assessment 5. CONCLUSION ACKNOWLEDGEMENT Annexure-A 23 IPage OFFICE OF THE DIRECTOR GENERAL AUDIT KHYBERPAKHTUNKHWA PESHAWAR No. AO/Audit Project/2018-19/ Dated: / 09 /2019 To The Project Director, Economic Revitalization, Khyber Pakhtunkhwa, Peshawar Subject: Annual Audit for the Financial Year 2018-19 Annual Audit of accounts record of your project has been scheduled to be conducted by an audit team of this Office as per audit plan approved by the Auditor General of Pakistan. It is requested to ensure the production of all the relevant record of your project to enable the audit team to finalize the task within the scheduled time. It is also requested to discuss the audit observations with the audit team at the end of the audit. Deputy ffe.. (:4I;for ~udit 24 IPage EXECUTIVE SUMMARY DirectorGeneral of Audit, Khyber Pakhtunkhwa conducted an audit of Financial Statements of the "Economic Revitalization in Khyber Pakhtunkhwa& FATA" Grant No.TF- OA4251 PAK financed by World Bank for the financial year 2018-19 in September, 2019. The main objectives of the audit were to express an opinion on financial statements of the project, to assess whether the project was managed with due regard to economy, efficiency and effectiveness, to review project performance against the intended objectives, and to review compliance with applicable rules, regulations and procedures. The audit was conducted in accordance with the International Standards of Supreme Audit Institutions (ISSAI). Audit findings:- • Unjustified payment of salaries of newl y recruited staff, consultant, procurement of luxury vehicles, re-imbursement, common facility center and Small Medium Enterprise (SME)-Rs. 44.184million. • Delay in completion of Technical, Environmental Survey of Changlagali-Mankhyal road and Tour Management Information system and non-utilization of budget-Rs . 23.685 million. • Non-deduction of Sales Tax, Income Tax, Stamp Duty-Rs.4.880 million. • Wasteful expenditure on account of advertisement charges- Rs.254,697/-. • Non-recovery of DPR charges for Rehabilitation of Disable Person and Professional Tax-Rs.224,886/- • Non-completion of procurement of hardware for the deployment of Tourism Management Information System and non-completion of supply in time-Rs. 115,000/- • Irregular payment to Small Medium Enterprises (SME's)-Rs.18.395 million. • Unauthentic grants to SME on up gradation of their businesses-Rs. 55.500 million . • Excess payment to Small Medium Enterprises (SME) in share in rehabilitation and allowing excess share-Rs.29.221 million . Recommendations: • Unjustified/unauthorized payment needs corrective actions . • Internal control system should bestrengthened for efficient utilization of budget and completion of specified activities in time. • Government taxes and Stamp duty should be recovered. • Wasteful expenditure should be justified. 25 IPage • DPR charges and Professional Tax should be recovered. • The process of procurement of hardware should be expedited besides making supply in time. • Irregular payment should be regularized. • Grant to in-eligible SME's should be authenticated. • Excess payment should either be justified or recovered. 26 IPage OFFICE OF THE DGA = 9211306 DIRECTOR GENERAL AUDIT Fax: = 9222417 KHYBERPAKHTUNKHWA PBX: = 211250-54 PESHAWAR No.Audit/F AP/DAC/2018-19/933 Dated: 30/09/2019 To The Secretary to Government of Khyber Pakhtunkhwa, Industries Department, Peshawar. Subject: Management Letter on the Project "Economic Revitalization in Khyber Pakhtunkhwa& FATA, World Bank/MDTF Grant No.TF-OA4251 PAK" financed by World Bank and Government of Khyber Pakhtunkhwa for the Financial Year 2018-19 This office has recently completed audit of the Financial Statements of the project"Economic Revitalization in Khyber Pakhtunkhwa& FA TA, World Bank/MDTF Grant No.TF-OA4251 PAK" financed by World Bank and Government of Khyber Pakhtunkhwa for the year ended 301h June 2019. While executing the audit, International Standards of Supreme Audit Institutions (ISSAI) adopted by the Auditor General of Pakistan were applied to express audit opinion on the Financial Statements of the Project. During audit, internal controls and other operational spheres were examined and result thereof is presented in the Appendix for consideration. The following are the audit findings : Unjustified utilization of precious time of the Project and payment of salaries of newly recruited staff-Rsl.650 million. 2 Delay in completion of Technical and Environmental Survey of Changlagali- Mankhyal road and non-utilization of 72% budget-Rs.17.185 million. 3 Non-deduction of Sales Tax, Income Tax and Stamp duty-Rs. I. I 03 million. 4 Delay in completion of Tourism Management Information System and non-utilization of 50% budget-Rs.6.500 million. 5 Wasteful expenditure on account of advertisement charges- Rs.254,697/- 6 Unjustified/ un-authorized payment to consultant -Rs.26.434 million. 7 Unjustified procurement of luxury vehicle Toyota Fortuner-Rs.7.863 million. 27 I Page 8 Non-deduction of GST-Rs.4.880 million. 9 Non-recovery of DPR charges for Rehabilitation of Disable Person-Rs.126,886/- 10 Non-completion of Procurement of Hardware for the deployment of Tourism Management Information System. 11 Non-recovery of Professional Tax-Rs.98,000/- 12 Non-completion of supply in time-Rs.115,000/- 13 Irregular payment to Small Medium Enterprises (SME's)-Rs.8.700 million. 14 Irregular payment-Rs.4.600 million. 15 Unauthentic grants to SME on up gradation of their businesses-Rs.55.500 million. 16 Excess payment to Small Medium Enterprises (SME) in share in rehabiliation- Rs.28 .970 million. 17 Unjustified reimbursement of Rs.2.00 to the SME and overpayment to Small & Medium Enterprise (SME)-Rs.470,000/- 18 Irregular payment ofRs.2.00 million. 19 Unjustified payment on account of Common Facility Centre -Rs.4,536,500/- 20 Irregular payment to Small Medium Enterprises (SME)-Rs.2,500,000/- 21 Unjustified payment to Small Medium Enterprises (SME)-Rs. l, 700,000/- 22 Irregular payment to Small Medium Enterprises (SME)-Rs.595,000/- 23 Excess payment due to allowing excess share-Rs.250,950/- The points contained in the appended report may please be looked into for remedial measures. Peshawar Dated: 30/09/2019 ~~:hto1 Depu ~ ~ u d i t 281 Page 1. INTRODUCTION The PC-I cost of the Project "Economic Revitalization in Khyber Pakhtunkhwa" isRs.l,287.600millionequivalents to US$ 12.00 million under Multi Donors Trust Fund (MDTF) grant. The project agreement was signed on 01.04.2017 between Islamic Republic of Pakistan and the World Bank. The project is implemented by the Industries Department, Government of Khyber Pakhtunkhwa. 2. AUDIT OBJECTIVES 2.1 The major objectives of the audit were to:- 1. Attest the Project's Financial Statements. 11. Report on compliance with relevant laws, policies and procedures. 111. Report on the overall management of the Project. 3 AUDIT SCOPE AND METHODOLOGY 3.1 Audit Scope The audit scope included the examination of documents, record and accounts, etc. of the project for the financial year 2018-19. 3.2 Audit Methodology Audit methodology was devised as per the following terms of reference: a) Eligibility of expenditure incurred Expenditure was reviewed to check that funds were expended for authorized purposes only in line with the provisions of PC-I and Contract Agreement. b) Assessment of procurement of civil works and consultancy services Procedure adopted by the Project Management for procurement was reviewed . c) Amount expended was incorporated in the Project Account supported by documents and records Expenditure trail was reviewed and with the help of supporting vouchers traced to accounting record and the financial statements. d) Assessing effectiveness of monitoring and evaluation mechanism Project internal controls were assessed and test checked for effectiveness. e) Maintenance of books of accounts Audit examined the quality and completeness of books of accounts. 29 IPage 4 AUDIT FINDINGS AND RECOMMENDATIONS 4.1 Organization and Management The Project is being executed by Secretary Industries, Commerce and Technical Education. 4.2 Financial Management 4.2.1 Unjustified utilization of precious time of the Project and payment of salaries of newly recruited staff-Rs.1.650 million According to Government of Khyber Pakhtunkhwa Sports, Tourism, Archaeology, Youth Affair and Museums Department letter No. SO(S) 3-2/ERKF/2018/10756-58 dated 1.11.2018 and even No. dated 26.11.2018 certain staff were demanded for Tourism Sector Activities to promote the tourism sector in Khyber Pakhtunkhwa and for Khyber Pakhtunkhwa integrated Tourism and enterprises Development Project(KITE) detail in Annexure-1. InProject, during financial year 2018-19, it was observed that after a tiring efforts from November 2018 to March 2019, following staff was appointed as per demand and required qualification suggested by the Tourism Department, started the salaries of the officers by paying them Rs.1.650 million up to June 2019. ,, S.No. Cheque No. Date Name of Officer Deshtnatlon Salarv I 132032699 30.4.2019 Ali Akbar Laisan Officer 412500 143891446 29.5.2019 -do- -do- 150000 143891494 20.6.2019 -do- -do- 150000 Senior Marketing 2 132032700 30.4.20 19 Umm-e-Ammara 296129 Officer 143891444 29.5.2019 -do- -do- 180000 143891492 20.6.2019 -do- -do- 180000 3 132032701 30.4.2019 Rashid Ali Jadoon, Graphic designer 0 143891445 29.5.2019 -do- -do- 0 143891493 20.6.20 19 -do- -do- 0 Communication 4 143891501 25.6.2019 SheharyarGul 282258 Expert Total 1,650,887 However, in the 3rd Project Steering Committee held on 04.07.2019, the Project Director ERKF informed the forum that Tourism Department vide their letter dated 11.4.2019 requested for termination of the services of 03 personnel placed at S.No. 1, 2 and 4 and suggested to the Secretary Tourism department, that staff are required with higher salary package within the range of Rs.500,000/- to 1,000,000/- .But instead of their termination they were accommodated in PMU, BOiT and Industry. This anomalous recruitment put the Project • into a loss of Rs.1.650 million . The lapse occurred due to mismanagement. 30 IP age When pointed out in July-2019,the managementstatedthat observation will be forwarded to Department of Tourism, as and when the reply received will be provided to audit within due time. Precious time of 05 months of the project and Rs.1.650 million was wasted just for nothing. Audit recommends inquiring into anomalous recruitment. 4.2.2 Delay in completion of Technical and Environmental Survey of Changlagali- Makayal road-Rs. 24.00 million. Contract for Technical and Environmental Survey of Changlagali-Makayal road was awarded to MIS NESPAK on 18.9.2018 for Rs. 24.000 million which was required to be completed in November, 2018 . InProject, during financial year 2018-19, it was observed that contract for technical and environmental survey of Changlagali-Makayal road was awarded to M/S NESPAK on 18.9.2018 for Rs.24.000 million. The job was required to be completed in November-2018, but till date only inception report and draft reports were submitted to the Project .. Authority,however, !Economic Feasibility report and final reports were still awaited.Apartialpayment of Rs. 6.815 million (396% against 50%) was allowed vide cheque No.117727241 dated 03.01.2019 and cheque No. 143891505 dated 25.6 .2019. So the activity was not completed in the stipulated time period in contravention of the contract agreement. The lapse occurred due to lack of internal control. This delay affected the achievements of outcomes on time. When pointed out in July-2019,the management stated that detailed reply will be furnished later on. Audit recommends strict compliance of the contract agreement for timely completion of the task. 4.2.3 Non-deduction of Sales tax, Income tax and Stamp duty- Rs. 1.103 million. According to Khyber Pakhtunkhwa Revenue Authority Sales Tax on Services Special Procedure (Withholding) Regulation 2015 , Notified vide Notification No.F-16( 4)KPRA/ Notification/WH/1383 dated 31-08-2015, 15% Sales Tax is applicable on services provided or rendered by Professionals and consultant, as per Sr. No. 37 of the Taxable Services as per Second Schedule to the Khyber Pakhtunkhwa Finance Act, 2013 .According to Finance Act 31 1P age 8% income tax was required to be deducted and according to FBR notification, deduction of 2% stamp duty should be made. InProject, during financial year 2018-19, it was observed that a sum of Rs. 4,415 ,733/- was paid to NESPAK videcheque No.143891505 dated 25.6.2019 for consultancy service regarding Technical and Environmental Survey of Changlagali-Makayal road, but 15% Sales Tax, 8% income and 2% stamp duty were not deducted from their bills as per detail given below:- Total amount of the bill Rs. 4,415,733/- 15% Sales Tax Rs. 662,360/- 08% income tax Rs. 353,259/- 02% stamp duty Rs . 88,314/- Total Tax Rs.1,103,933/- The lapse occurred due to extending undue benefit to the firm due to which various taxes were not deducted from the bill. When pointed out in July-2019,the management stated that invoice wasofRs 9.6 million and the project fund balance was Rs.4.4 million, as and when the balance amount of Rs.5.1 million wouldreleasefull taxes will be deducted and reported to audit. Audit recommends full deduction of taxes from the firm. 4.2.4 Delay in completion of Tourism Management Information System and non- utilization of 50% budget-Rs. 6.500 million. Contract for Tourism Management Information Systemwas awarded M/S LMKT (Pvt.) Ltd on 12.6.2018 for Rs . 13 .000 million and was required to be completed in February, 2019. InProject, during financial year 2018-19, it was observed that contract for Tourism Management Information Systemwas awarded MIS LMKT (Pvt.) Ltd on 12.6.2018 for Rs. 13.000 million. The Job was required to be completed in February, 2019 but till date the following componentswere still awaited. • Deliverable of Phase-I costing Rs. 2.600 million which comes to 20% of the contract cost required to be completed during 3rd to 7th month is till awaited. • Training to staff costing Rs. 3.900 million which comes to 30% of the contract cost required to be completed after one month of the Phase-III. Following 50% payment Rs. 6.5 million was made to the consultant:- • 32 IP age Cheaue No. Date Amount Remarks 86155198 16.8.2018 2600000 20% on approval of Gap Anal sis. 86155225 18.8.2018 1300000 10% on approval of inception report. 132032682 16.4.2019 1300000 10% on aooroval of deliverable Phase-II 99388990 13.5.2019 1300000 I 0% on aooroval of deliverable Phase-III Total 6500000 So the activity was not completed in the stipulated period. This cause delay in operationalisation of the project. The lapse occurred due to lack of internal control. When pointed out in July-2019,the management stated that the opening has been done in the month of July-2019, and the balance amount will be released upon the satisfaction of Department of Tourism. The objective of the Project to design and develop an Integrated Management Information System for the Tourism which make the current manual/print date of TCKP,DTS and TFC available on line allow for algorithm analysis. Audit recommends the management to strengthen the internal control system for efficient utilization of budget and performance of all employees of the organization to achieve the project objectives. 4.2.5 Wasteful expenditure on account of advertisement charges- Rs.0.255 million According to Government of Khyber Pakhtunkhwa Sports, Tourism, Archaeology, Youth Affair and Museums Department letter No. SO(S) 3-2/ERKF/2018/619-20 dated 14.01.2018 addressed to the Project Director PMU EKRF Peshawar " As agreed by the World Bank, the following activities for Khyber Pakhtunkhwa Integrated Tourism and Enterprises Development Project(KITE) project need to be initiated by the ERKF under Component-IV. • Destination Management Plans(Kumrat and Naran including from Kaghan to Babosor Top). • Safeguard study for Kalam-Kumrat Road (Environmental & Social Safeguard documents for Kalam-Kumrat road including Mataltan to Mahudand Swat. These activities were also approved in the 2nd Project steering Committee Meeting held on 08.1.2019 in item No. 3. InProject, during financial year 2018-19, it was observed that sum of Rs. 254,697/- was paid to Director Information on account of advertisement charges. The advertisements were published in various newspapers on 14, 17 and 18/1/2018 and 7, 10 and 11/12/2018. 33 IPage Cheque No. 132032681 dated 3.12.2018 Rs. 156, 129/- Cheque No. 50495077 dated 09.5.2018 Rs. 98,568/- Total Rs. 254,697/- Audit is of the view that the expenditure incurred is wasteful because the selection process was started from January-2018 and ended in January-2019, M/S EBP Schweiz in N with M/S Semiotics consultant Pvt. Ltd. Islamabad as top ranked firm were selected however, the Secretary to Government of Khyber Pakhtunkhwa Sports, Tourism, Archaeology, Youth Affair and Museums Department has ordered to close the existing process and allow to re- initiate the hiring process on Quality & Cost Based Selection(QCBS) instead on (CQS). So the time and money of Foreign Grant was wasted just for nothing. When pointed out in July-2019,the management stated that S.No.02 will be re- initiated as per decision of PSC meeting. S.No.01 PSC deleted the activity as per demand of Department of Tourism, relevant record will be provided. The lapse was occurred due to lack of management information system. Audit recommends for justification and appropriate action. 4.2.6 Irregular payment to consultant -Rs. 26.434 million. Contract of preparation of Environmental Social Safe Guards documents was awarded to MIS NESPAK on the basis of Staff and their remunerations reflected in the Contract agreement page 30 to 33. InProject, during financial year 2018-19, it was observed that the consultancy for "Preparation of Environmental Social Safe Guards Documents" was awarded to MIS NESPAK Pvt. Ltd. Consultants at the total cost of Rs. 26.434 million, and whole payment has been made to the firm. Scrutiny of the record further revealed that the key personnel as mentioned/claimed in the invoices were different from those mentioned/ approved in the financial proposal and contract agreement on the basis of which, the firm was awarded the consultancy contract and 06 No . key personnel were replaced out of 10 without approval of the client. Hence, the payment of Rs.26.434 million made stands unjustified and unauthorized. Audit is of the view that since the Consultancy Contract was awarded to MIS NESPAK PvtLtd . Consultants on the basis of qualification and experience of the key personnel and as per agreement, the consultant firm was bound to deploy these personnel but the key personnel were changed without te approval of the client. It is also not confirmed whether the deployed personnel are having equal or better qualification . 34 I Page Audit held that the irregularity occurred due to weak internal controls, financial mis- management and undue favor to the consultant firm . When pointed out in July-2019,the management stated that all the required documents will be obtained from the consultants and will be provided to audit. Audit recommends enquiry and fixing responsibility on the person(s) concerned. 4.2.7 Non-deduction of GST-Rs. 4.880 million. According to Finance Act, 2018, 17% GST shall be deducted from the suppliers. According to Toyota Khyber Motors (Pvt) limited Rs . 4 .880 million was claimed in the bill dated 24.5.2019 (3 Unit price 28,707,692 plus 17% GST 4,880,308/- = 33,588,000/-). InProject, during financial year 2018-19, it was observed that a sum of Rs. 733.588 million was paid to Indus Motors Company Pvt. Ltd. for the supply of 03 Toyota Coaster (High Roof) vide cheque No. 143891442 dated 28.5 .2018. Audit observed that the payment was made without 17% GST amounting to Rs. 4.880 million which was already claimed by the firm in the bill. The lapse was occurred due to non-implementation of Government rules and orders due to which l 7%GST amounting to Rs. 4.880 million was not deducted. When pointed out in July-2019, themanagement stated that bill of entry/shipment documents will be provided to the audit in due course of time . Audit recommends for corrective action. 4.2.8 Non-recovery of DPR charges for rehabilitation of disable person-Rs.0.127 million According to Directorate of Social Welfare & Women Development Department Peshawar letter No.DPR/Pub/PCRDP/559-63 dated 18-05-2012 and Section-11 of the disable person (Employment and Rehabilitation Ordinance 1981 and Rules 1991), the deduction of DPR Fund for rehabilitation of disable persons from the bills/payment @ Rs. 2000/- each per million and deposit into the Head No. G-12218 "fund for rehabilitation of disabled persons" . InProject, during financial year 2018-19, it was observed that a sum of Rs 63,433 ,215/- was paid to various contractors . However, DPR charges @ the rate of Rs. 2000/- per million, amounting to Rs.126,866/- were not deducted from the payment made as detailed below: • 35 I Page S. No Cheque No Date Firm Particulars Amount (Rs) 1 143891449 29-05-2019 IT charges Hardware 3121512 2 143891450 29-05-2019 Premier Hardware 4667660 3 105443301 26-11-2018 IT Charges Equipment 5050147 4 105443311 30-11-2018 Crystal Printing 3348450 5 86155212 10-09-2018 Khyber International 1796170 6 9938956 10.9.2018 Passion Art Printing 1534276 7 143891442 28.5.2019 Indus Motors Purchase of 41451000 Comany Vehicle 8 143891441 28.5.2019 -do- -do- 2464000 Total 63,433,215 DPRCharges 126,866 The lapse occurred due to non-adherence to the provisions of rules and weak internal controls. When pointed out in July-2019, themanagement stated that the supplier will be contacted for the payment ofDPR as per notification. This action of the local office resulted into non recovery of DPR charges. Audit recommends recovery of DPR charges as pointed out above. 4.2.9 Non-recovery of professional tax-Rs.98,000/- According to Section-II of the Khyber Pakhtunkhwa, Finance Act No. PNKPK/Bills/2014/340 dated 02.7.2014, the Provincial Government levied the subject tax at the following rates:- When exceeding one million but not exceeding Rs. 2.5 million Rs.7000/- When exceeding 2.5 million but not exceeding Rs. Ten million Rs.18000/- When exceeding 25 million but not exceeding Rs. 50 million Rs.30000/- InProject, during financial year 2018-19, it was observed that professional tax amounting to Rs. 98,000/- was not deducted from the following contractor as required under Finance Act :- Professional S. No Cheque No Date Firm Particulars Amount (Rs) Tax 1 143891449 29-05-2019 IT charges Hardware 3121512 18000 2 105443301 26-11-2018 IT Charges Equipment 5050147 4 143891450 29-05-2019 Premier Hardware 4667660 18000 4 105443311 30-11-2018 Crystal Printing 3348450 18000 5 86155212 10-09-2018 Khyber International 1796170 7000 6 9938956 10.9.2018 Passion Art Printing 1534276 7000 • 36 IP age Indus Motors Purchase of 7 143891442 28.5 .2019 41451000 Company Vehicle 30000 8 143891441 28.5.2019 -do- -do- 2464000 Total 63,433,215 98,000 The lapse occurred due to non-adherence to the provisions of rules and weak internal controls. When pointed out in July, 2019, themanagement stated that certificate will be obtained from supplier and will be produced to audit otherwise recovery will be made. This action of the local office resulted into non deduction of professional tax. Audit recommends deduction of professional tax as pointed by Audit. 4.2.10 Irregular payment to small medium enterprises (SME's)-Rs.8.700 million. According to clause 2.1.4 (vi) of operational manual of the project, all beneficiaries of Matching Grant (MG's) will be required to open a bank account in the name of business with a formal financial sector institution that may include mobile banks for receipt of grant. InProject, during financial year 2018-19, it was observed that payments were made directly to SME account instead of payments through business account. List of SME's is attached at annexure A. The lapse occurred due to weak internal controls and financial miss-management. When pointed out in July-2019, themanagement stated that the observation will be conveyed to SMEDA for detailed reply,as they sent the payment request on the name of the SME instead of business account. Rules& regulations of the operational manual were not followed. 4.2.11 Irregular processing of cheques-Rs. 4.600 million According to clause 2.4.8 (104) of operational manual of the project,respective PMU will issue grant cheque to SMEDA PU within fifteen (15) business days after receipt of cheque issuance request from SMEDA PU. InProject, during financial year 2018-19, it was observed that Ittehad medical lab'scheque request was forwarded to PMU on 16-05-2018, and cheque received back on 15- 02-2019.Similarly Noor-al-emaar construction co.cheque forwarded on 09-05-2018, and received back on 21-12-2018 and MIS Nisar Muhammad Khan co.cheque forwarded on 10- 07-2018 and received back on 30-01-2019 (detailed below) which is against the clause 2.4.8 (104). 37\ P age Cheque Request Days S.No Business Name received from Amount Forwarded on lapsed PU on I Ittehad medical lab 16-05-2018 15-02-2019 275 1400000 2 Noor el emaar co 09-05-2018 21-12-2018 226 1500000 MIS Nisar Muhammad 3 10-07-2018 30-01-2019 204 1700000 Khan Total 4,600,000 The lapse occurred due to weak internal controls and financial mis-management. When pointed out in July-2019, themanagement stated that detailed reply will be furnished later on. Rules of the Operational Manual were not followed. 4.2.12 Unauthentic payments to SME for up gradation of their businesses-Rs. 55.500 million. Main objectives of the project i.e. upgrade productivity and enhance product quality of SME's- enhance economic growth to boost employment opportunities in the province, engagement of potential youth in economic activities of the province, create corporate culture in the province, increase tourist activities in the province, increase an institutional effectiveness through strengthen capacity. According to description and brief justification of the project is the real potential Small &Medium Enterprise (SME) growth in the province is the development of deprived people of this province who are quite keen to raise their standard of living but the real problem associated with them is financing and technical assistance. InProject, during financial year 2018-19, it was observed that a sum of Rs. 55 .500 million was granted to those SME who were financially stable and sound SME's and were able to procure assets and had a potential to bear expenses by their own. On another hand poor Small& Medium Enterprise (SME) whose businesses were limited and were unable to procure assets for up-gradation, were deprived of such facilities which was against the project objectives and scope of the PC-I i.e. to compensate the needy and poor small & medium enterprise (SME) who have no such finances to procure and apply for reimbursement. Depriving of poor SME's is against the fate of the project to give financial protection. The lapse occurred due to weak internal controls and financial mis-management. When pointed out in July-2019,the management stated that ERKF grant support is available for all SME's having legal business in KP. Grant opportunities are advertised on mass media and there is no restriction on SME to avail grant having stable financial condition. > 381 Page Poor SME's were deprived from the benefit of this Project. 4.2.13 Excess payment to Small & Medium Enterprises share in rehabiliation-Rs.28.970 million . .- According to PC-I of the project Economic Revitalization of Khyber Pakhtunkhwa&FAT A funds distribution between sub components in regions that is one of the main objectives of the project is to provide support to SME's therefore maximum allocation has been made for up-gradation through matching grants funds distribution between the sub- components in regions are shown as: Khyber Pakhtunkhwa Sub Component Percent Share (M USD) Up-gradation 70% 5.18 Individual/Clusters Rehabilitation Individual 30% 2.22 Total lOO °(o 7.40 InProject, during financial year 2018-19, it was observed that an amount of Rs. 269.94 million as grant had been paid to 335 numbers of Small& Medium Enterprise (SME) in which up-gradation share of 70% is amounting to Rs. 188.95 million. Whereas, the department have paid 159.9 million to (SME) resulting in Rs. 28.970 million less and in rehabilitation share Rs. 80.98 million to 101 (SME) was required to have been paid but instead Rs. 109.95 million to 202Small~ Medium Enterprise (SME) was paid resulting in Rs. 28.970 million excess payment in share of grant, which was paid irregular as detailed below: (Amount in Rupees) Total Actual Grant Type Grant Paid Required% Paid% Excess/(Less) durin2 Year Up gradation 188,955,291 159,984,430 (28,970,861) Less share 70% 269,936,130 Rehabilitation 80,980,839 109,951 ,700 28,970,861 Excess share 30% Total No's of Grant Type Required% Paid% Excess/(Less) SME's Up gradation 235 135 (100) Less share 70% 336 Rehabilitation 101 202 101 Excess share 30% The lapse occurred due to weak internal and financial controls. When pointed out in July-2019, themanagement stated that ERKF project unit follows operational manual for approval & disbursement and in operational manual, there is no mention of 30%170% ratio. PC-I is a binding document on PMU KP & the Para will be discussed with PD PMU KP. ,, Rules of the Operational Manual were not followed. . 39 IP age Audit recommends to observe the rules of the operational manual. 4.2.14 Unjustified reimbursement of Rs. 2.00 million to the SME and overpaymentto Small& Medium Enterprise (SME)-Rs.0.470 million According to clause 57 of the Operational Manual,the PU will further ensurethat: • grants are awarded in a transparent fashion • the proposed grant activity is relevant to theproject • sustainability is satisfactorily addressed in theproposal • the applicant meets all applicable project' s regulations andrequirements lnProject, during financial year 2018-19, it was observed that (SME) VIP House received grant amounting to Rs. 2,000,000/- vide cheques No.43891448dated 29-05-2019 and another (SME) Shelton Green Hotel received grant amounting to Rs. 2,000,000/- vide chequeNo.117727280 dated 28-01-2019. Whereas, the documents shown that both the businesses are owned by husband & wife residing in a same address i.e. house No.1155 , Gali No .64 sector Gl0/4 Islamabad . Moreover, the quotation for both the Small & Medium Enterprise (SME) from whom the goods have been procured shows same firms , same specification on the same day vide reference No. 01/Greens/09/ 18 dated 20-09-2018, that resulted in over payment to small & medium enterprise (SME) . MIS Sarni & Sarni the successful bidder in both the cases had quoted Rs. 4,600,000/- for solar system in case of JamilaTahir on 20.9.2018 whereas,Rs. 4,130,000/- was quoted in case of Abdul MuqeeTahir (husband of JamilaTahir) for same solar system on the same day and for the same specification and interestingly the remaining two bidders namely M/S Zaibi Enterprises and MIS Khalmasco enterprise had submitted the quotations for different rate on the same date for the same solar system and for the same specification. So the quotation for both the (SME) from whom the goods have been procured shows same firms , same specification on the same day vide ref#O 1/Greens/09/18 dated 20-09-2018 that results in over payment to (SME) detailed as below:- S.No Description Unit Qty Unit rate 1 Unit rate 2 Difference Solar penal 40 l KW :sardonic 330 W w 40000W 65 67 320000 German cells 2 Inverter SOK Goodwee l I 750000 600000 150000 Total 470000 The lapse occurred due to weak internal and financial controls. When pointed out in July-2019, the management stated that quotations are obtained to assess market prices however; additional verification is done from open market. The .- 40 I Page recommended amount is based on assessment from market which may or may not vary from the quotation. However taking the audit observation into consideration the recommended verifications will be carried out. . Rules of the operational manual were not followed. Audit recommends that detailed investigation may be carried out to fix the responsibility on the person(s) concerned, recovered the overpaid amount, black list all the three firms for quoting such alike rates and verification of (SME) Shelton Green Hotel may also be carried out to ascertain whether SME is now available or not. 4.2.15 Irregular payment for purchase of vehicle-Rs. 2.00 million According to clause 2.1.4 (iv) each applicant will submit a business plan for using the Matching Grant (MG) while SMEDA will provide applicants template and guidance for preparing the business plans. InProject, during financial year 2018-19, it was observed that Alam Enterprises had procured two Toyota pickup 2x2 (detailed below), while in business plan it has shown only one Toyota pickup. So irregular payment of Rs.2,000,000/- was made vide chequeNo. 105443261 dated 31-10-2018 due to false information presented in business plan. S. No Vehicle Ree: No Model Ene:ine No I JA 6141 2018 2KDU991519 2 C 4081 2018 2KDU991713 The lapse occurred due to weak internal controls and financial miss-management. When pointed out in July-2019, themanagement stated that the applicant had applied for vehicle and racks. As racks do not fall within the up-gradation plan, therefore the SME was asked to apply for any other technological up-gradation other than racks. Hence SME submitted revised business plan for purchase of two Toyota vehicles. Rules of the operational manual were not followed. 4.2.16 Unjustified payment on account of Common Facility Centre-Rs. 4.537 million According to 2.2.3 (51) of the Operational Manual of the project, Cluster Up- gradation grants will be provided to a group of SME's (at least 3 SME's). Registered business support plat forms e.g. Associations etc. (registered before 1st May 2014) will also be eligible to apply. Preference will be assigned to those projects which will benefit not only the participating SME's, but the whole cluster. Also 2.2 .3 (53) states at least one SME's (preferably team leader) applying for cluster up-gradation grants must have existing business • setup, prior tolst May 2014, as mentioned in eligibility criteria the other two partner's SMEs .. must have existing business setup prior to 1st January 2016 . 41 I Page InProject, during financial year 2018-19, it was observed that a sum of Rs. 4,536,500/- vide cheque No. 5443345 dated 28.12.2018 was paid to Mr. Pervaiz Khan Khattak Group Leader of common facility centreNowshera. However, Audit observed the • payment is unjustified due to the following reasons: • Detail feasibility study was required to be carried out being heavy project as 3 businesses are involve in the project. • Registration with Sarhad chamber of Commerce and Industry Peshawar which was required to be taken place before May 2014 had actually been carried out in March 2016 and March 2017 • Utility bill of MIS Gandahara CNG station was not available on record. Moreover financial analysis was not provided in the business plan to achieve the goal as provided in operational manual. • The machinery was old and repainted whereas documents shows fresh procurement the ownership is also not clear and it seems as a sole proprietorship. The lapse occurred due to weak internal controls and financial mis-management. When pointed out in July-2019, themanagement stated thatSr.No.las per Operational Manual, only business plan was required and not a feasibility study Sr.No.2. The business existence prior to May 2014 was verified from CNG, NTN and lease agreementmaking chamber registration a non-mandatory document on which case was not based.Sr.No.3Utility bills are not a mandatory in this case since business existence is verified from registered association letter, NTN and lease. Rules of the operational manual were not followed . Audit recommends appropriate action . 4.2.17 Irregular payment to Small Medium Enterprises (SME)-Rs. 2.500 million According to clause 2.1.4 (40) (viii) of Operational Manual,SME business should have been functional before May 1, 2014. At least one of the following documents will be provided as the proof that small & medium enterprise (SME) had businessoperationsi.e. production, selling, trading, investing, hiring employees, purchasing machinery, etc. prior to May 1, 2014 . InProject, during financial year 2018-19, it was observed that a Small & Medium , Enterprise (SME) Ali bothers Ice Factory had received rehabilitation grant amounting to Rs. ... 42 IPage 2,500,000/-vide chequeNo17727288 dated 29-01-2019, which was termed as irregular on the following grounds: • Patwari report shows partially damaged physical assets, whereas according to SME • his whole factory valuing millions of rupees was destroyed completely . • M. Akramustad in charge technician of the ice factory is residing in UAE as evident from the attendance register. • No proof of operations of said Ice factory from 2009 till receiving of grant is available on record. • Factory is located in Takhta band road Balogram, Swat whereas business account is located at district Buner. The lapse occurred due to weak internal controls and financial mis-management. When pointed out in July-2019, themanagement stated that Sr.No.01 business damages were verified by the letter from Assistant Commissioner as well as by Patwari in 2013, so actual damage was not determined at that time. Sr. No.02NICOP only proves that he has been abroad but doesn't prove that he was still living there. Sr.No.03 at least one document was required as proof of existence. In the file there was existence certificate issued by Assistant Commissioner as well as attendance record of employees from 2008-2013 . Sr.No.04 applicant was the resident of Buner and has his business account there but no clause in OM for such practice to have account in another city. Rules of the operational manual were not followed. 4.2.18 Unjustified payment to Small Medium Enterprises (SME)-Rs.1.700 million According to clause 2.1.4 (i) Ownership and citizenship, the SME owner must be a citizen of Pakistan whose business is located in KP or FATA and began operations on or before May 1, 2014. InProject, during financial year 2018-19, it was observed that grant have been paid amounting to Rs.1700,000/- vide cheque no 50495125 dated 06-08-2018 to Platinum Co although the owners of the grant were Ex-Pakistani nationals hence, the grant was unjustifiably paid. S.No Owners Name CNIC No 1 Muhammad Ayub Khan 173014-981990-9 2 Rahina Khan 27637-4100925-2 The lapse occurred due to weak internal controls and financial miss-management. • 43 I Page When pointed out in July-2019,the management stated that Mr. Muhammad Ayub Khan holds NICOP whereas Mrs. Rahina holds POC.NICOP is issued to existing citizens whereas POC is issued to Ex-citizens. The same issue was raised in GRDC and was referred • to World Bank by them. World Bank allowed the processing of case subject to confirmation • that the prime applicant is the citizen of Pakistan. Rules of the operational manual were not followed. Audit requires documentary evidence. 4.2.19 Irregular payment to Small Medium Enterprises (SME)-Rs.0.595 million According to Field Coordination visit to SME dated 21.8 .2017 after verification of the computer accessories, he recommended reimbursement of Rs. 205,000/- InProject, during financial year 2018-19, it was observed that small & medium enterprise (SME) Shalzon IT solutions received grant amounting to Rs. 800,000/- vide chequeNo. 50495135 dated 06-08-2018 whereas field coordinator recommendedRs. 205,000/- on the basis of verification of IT equipment during his visit to the site on 21.8.2017 .However, GRDC recommended an amount of Rs. 800,000/- which resulted into excess payment amounting to Rs. 595,000/- which is irregular. The lapse occurred due to weak internal and financial controls. When pointed out in July-2019, the management stated that GRDC had approved Rs. 205,000/- for IT equipment's in its 3rd GRDC meeting. Applicant replied for review of case through grievance released mechanism, on review GRDC allowed Solar system and furniture by enhancing the grant to Rs. 8,00,000/-Approval rejection, reduction and enhancement is under the mandate of GRDC. Rules of the operational manual were not followed. 4.2.20 Excess payment due to allowing excess share-Rs.0.251 million According to clause 2.2.4 (Table 5) minimum cost sharing by SME's is 50%. InProject, during financial year 2018-19, it was observed that a sum of Rs. 4,536,500/-waspaid to SME videcheque No. 5443345 dated 28.12.2018.The record revealed that invoices for the machinery etc valuing Rs. 8,571, 100/-were available on record, therefore, Rs.4,285,550/- was required to be paid whereas actual payment of Rs.4,536,500/- was made to the SME. Hence, Rs. 250,950/- were paidin excess. The lapse occurred due to weak internal controls and financial miss-management. 44 I Page When pointed out in July-2019, themanagement stated that price of machinery is Rs. 9,088,500/- payment slip favor of Suzuki Nowshera Motors and excise document in part of SME file which was not added to 8,571,100/- in observation. No excess payment was made . • • Rules of the operational manual were not followed . Audit recommends revised reply with documentary evidence. 4.3 Procurement and Contract Management 4.3.1 Unjustified procurement of luxury vehicle Toyota Fortuner-Rs. 7.863 million. According to documents the World Bank allowed the 4 x 4 pool vehicles. lnProject, during financial year 2018-19, it was observed that a sum of Rs. 7.863 million was paid to Indus Motors Company Pvt. Ltd. for the supply of Toyota Fortuner 2.8 LTR DIESEL (SIGNMA-4) vide cheque No . 143891442 dated 28.5 .2018. Audit observed that the procurement was unjustified because the World Bank allowed the 4x4 pool vehicle, however the project authority procured a luxury vehicle Fortuner 2.8 LTR on the approval of Secretary tourism vide note sheet Para-12, which was unjustified because in that price two vigo champ could be purchased and such kind of luxury vehicle is against the Government of Pakistan and KP economy policies. The lapse occurred due to non-implementation of Government rules and orders. When pointed out in July, 2019,the management stated that the detailed reply will be furnished later on. Economy policies of the Government were violated. Audit recommends for corrective action . 4.3.2 Non-completion of procurement of hardware for the deployment of Tourism Management Information System. According to Minutes of the Procurement Committee meeting held on O1.01.2019 Tourism Department forwarded the request for the procurement of the following hardware :- S.No. Descrivtion S.No. Descrivtion 1. Annlication Server qty 01 7. Printer MFP qty-10 Laptop (Mobile work station Video Conference System 2. 8. qty-02) qty-01 3. Branded Laptop Qty-04 9. Tablet (Android) 4. Branded desktop computer Qty 16 10. Wireless communicator Branded UPS for Desktop 5. 11. CCTV System Camera Qty 40 computer Qty-16 6. Card Printer • 45 IPage InProject, during financial year 2018-19, it was observed that a sum 7.788 million was paid to various firms for supply of hard ware placed at S.No. 2, 3,4,6, 7 and 08 however • hardware placed at S.No. 5,9, 10 & 11 were not purchased . (R.s in million) • Particulars Cheque No. Date Amount • MIS Premier 143891450 29.5.2019 4.667 MIS IT Chasers 143891450 29.5.2019 3.121 Total 7.788 The lapse occurred due to non-observance of procurement rules. When pointed out in July-2019, themanagement stated that detailed rely will be furnished later on. The objective of project to promote the tourism in the province and to facilitate tourists across the country was badly suffered. Audit recommends the management to utilize the funds efficiently to minimize the risk of time and cost overrun. 4.3.3 Non-completion of supply in time-Rs. 115,000/- According to Supply order No. PMU/ERKF/6116 dated 29.8.2017, the firm was required to deliver the LED 60" within four weeks i.e. 29.9.2017 . . InProject, during financial year 2018-19, it was observed that Supply order for 60" . LED was issued to M/S Mian Construction Engineer vide PMU/ERKF/6116 dated 29.8.2017 for delivery of the said LED up to 29 .9.2017. However, record revealed that the said LED was delivered on 17.11.2017 and payment was made vide Cheque No. 86155213 dated . I 0.9.2018. Neither extension was granted to the firm nor was any penalty imposed . The lapse occurred due to non-implementation of Government rules and orders. When pointed out in Jul-2019, the management stated that detail reply will be furnished later on. Activities of the project were badly suffered. The matter is therefore, reported for corrective action 4.4 Assets Management Physical verification of stock andassets of the local office was conducted as required under Para 159 GFR Vol-I duly incorporated in the Financial Statements. 4.5 Monitoring and Evaluation Monitoring and Evaluation system should be strengthened so that project is managed properly and the objectives are achieved within the ambit of provided resources. Moreover, • 46 IPage internal audit of the project was also carried out by the Principal Accounting Officer as required under para-13 of GFR Vol-I, which was not submitted to Audit. - 4.6 Compliance with grants/loan covenants Short comings have been reported in the audit findings. 4. 7 Environment The program has no negative environmental impact. 4.8 Sustainability After completion of the Project, the income of the residents of the target area is expected to rise significantly. The Project is sustainable. 4.9 Overall Assessment Audit recommends that internal control systems should be strengthened so that the project objectives could be achieved within the stipulated period and budget. 4.9.1 Relevance The project is in line with the policies of theGovernment. 4.9.2 Efficacy The overall physical and financial performanceshould be improved so that to achieve . its objectives within the stipulated time period . 4.9.3 Efficiency • The project management should utilize the funds as per PC-1 to achieve the objectives of the project efficiently. 4.9.4 Economy Delayed completion will increase the operational cost of the project. 4.9.5 Effectiveness The overall performance of the project will have a positive impact on the people of target area. 4.9.6 Compliance with rules: In certain cases Financial Rules & Regulations were violated as pointed out in the audit findings. 4.9.7 Performance Rating of Project: The performance rating of project is moderately satisfactory. 4.9.8 Risk Rating of Project: The risk rating of the project is medium . • 471 Page 5. CONCLUSION The internal .control system needs to be improved and strengthened. The criteria I provided in the PC-I should be followed . ... (i) Key issues for the Future: Issues that could limit/hamper project/program ' s performance and achievement of intended objectives were: ~ The project should be implemented efficiently to avoid cost and time overrun. ~ DAC meetings should be arranged on the audit observations. ~ Funds should be released/utilized as per PC-I. (ii) Lessons Identified: Grant Disbursement & Review Committee (GDRC), Grant Review Committee (GRC) should vigorously perform their duties/mandate along with internal control system should be strengthened so that time and cost overrun are avoided and the project could be completed within the approved budget and time . ... • • 48 IPage ACKNOWLEDGEMENT 1 We wish to express our appreciation to the management and staff of the project . "Economic Revitalization in Khyber Pakhtunkhwa& FATA" for the financial year 2018- l 9for the assistance and cooperation extended to the audit team during this assignment. ... • ... 491 Page ANNEXURE-A Applicant S. No Name of Business Grant id Cheque No Date Amount 1 Name Abdul .... 1 Abdul Khaliq KhaliqChappal 115 05443305 26-11-2018 500000 . store Ali Ali Muhammad 2 249 86155181 08-08-2018 250000 Muhammad shoes Ayaz 3 Sultan traders 403 50495149 08-08-2018 600000 Muhammad Dilorakzai cloth 4 Wazirhasan 270 50495139 06-08-2018 500000 house Paper 5 Nasirahmad 39 86155189 09-08-2018 600000 communication Sharjah Fancy 6 Shah Jehan 37 50495150 08-08-2018 500000 variety center 7 Riazahmad Riaz corporation 107 86155179 08-08-2018 600000 Bashir ahmad 8 Bashir ahmad wholesale & 596 86155245 05-10-2018 300000 general store Atta Science public 9 15 86155190 09-08-2018 800000 Muhammad school Wasim PCO 10 Safdar Khan Photostat books & 954 86155180 08-08-2018 1000000 stationery house 11 Shabbirahmad Qazi cloth house 33 86155187 09-08-2018 700000 " Muhammad Marhaba Khan 12 30 86155191 08-08-2018 1000000 Naeem Fashion center Majid Ur Majid shopping 13 316 50495133 06-08-2018 250000 Rehman center Nisarahmad City computer 14 20 86155256 08-10-2018 500000 Khan institute Shareefahmad 200000 15 Shareefahmad 598 86155240 05-10-2018 general store Zanana Super 16 Nasreen market 1283 50495138 06-08-2018 400000 &Beautyparlor Total 8700,000 50 IP age