l' THE UNITED REPUBLIC OF TANZANIA NATIONAL AUDIT OFFICE - REPORT OF THE CONTROLLER AND AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF ENERGY AND WATER UTILITIES REGULATORY AUTHORITY - ENERGY SECTOR CAPACITY BUILDING PROJECT- PROJECT NUMBER 126875 - TZ FOR THE YEAR ENDED JOTH JUNE, 2016 The Controller and Auditor General, National Audit Office, 16 Samora Machel Avenue, P. 0. Box 9080, 11101 Dar es Salaam. Telegram: "Ukaguzi" Telephone: 255 22 2115157 / 8 Fax: 255 22 2117527 E-mail: ocag@nao.go.tz Website: www.nao.go.tz Dar es Salaam, Tanzania. AR/ESCBP/2015/2016 ENERGY AND WATER UTILITIES REGULATORY AUTHORITY ENERGY SECTOR~ -GAPAC~TV--8U4l-04NG flR(HE<:T- PROJECT N0.1268 75-TZ Office of the Controller and Auditor General National Audit Office The United Republic of Tanzania The statutory duties and responsibilities of the Controller and Auditor -General are enshrined under Article 143 of the Constitution of the URT of 1977 and further amplified under Sect. 10 of the Public Audit Act, No. 11 of 2008. Vision To be a Centre of excellence in public sector auditing. Mission To provide efficient audit -services in or.der to enhance accountability and value for collection and use of public resources. money in the - In providing quality services, NA-0 i-s guided by the following Core Values : ./ Objectivity: We are an impartial organization, offering services to our clients in an -objective and unbia-sed manner; ./ Excellence: We are professionals providing high quaHty audit services based on best practices; ./ Integrity: We observe and maintain high standards of e t hical behavior and the rule of law; ./ People focus : We focus .on stakeholders' needs building a culture of good customer care having competent and motivated work force; ./ Innovation: We are a creative organization that constantly promotes a culture of developing and accepting new ideas from inside and outside the organization; and ./ Best resource utilization: We are an organization that values and uses public resources entrusted to it in efficient, -economic and effective manner. We do this by: - • Contributing to better stewardship -0f public funds by ensuring that our clients are accountable for the resources entrusted to them; • Helping to improve the quality of public services by supporting innovation on the use of plib{ic resources; · • Providing technical advice to our clients on operational gaps in their operating systems; • Systematically involve our clients in the audit process and audit cycles; and • Providing audit staff with adequate working process tools and facilities that promote independence. © This audit report is intended for use by the ESCBP Management. However, upon adoption of the report by the Project Coordinator this report becomes a matter of public record and its distribution may not be limited. Office of the Controller and Auditor General AR/EWURA-ESCBP/2015/2016 ii ENERGY AND WATER UTILITIES REGULATORY AUTHORITY ENERGY SECTOR CAPACITY BUILDING PROJECT- PROJECT N0. 126875-TZ Table of Contents Office of the <:ont roller and Auditor Genera! .......................................... ... ..... .... ...... ... ....... .... ....... ii DEFINITION -OF TERMS AND ABBREVIATIONS ..................... .. .............. ..................... .......................... iv 1. BACKGROUND AND GENERAL INFORMAnON ............. ..................... .... .............................. ......... l 2. REPORT OF TH£ fNERGY SECTOR CAPACITY BUILDING PROJECT (ESCBP ) .. ........................ 3 5 ..0 AUDIT REPORT ON THEflNANCIAL STATEMENTS .... ................... ................. .. ..... ...............10 6.0 SPECIAL PURPOSE FINANCML STATEMENTS ... ..................................... .... ............................12 9.0 SUMMARY OF SIGNIFICANT ACCOUNTING POUCIES ......... ..................................................13 Office of the Controller and Auditor General AR/EWURA-ESCBP/2015/2016 iii ENERGY AND WATER UTILITIES REGULATORY AUTHORITY ENERGY SECTOR CAPACITY BUILDING PROJECT- PROJECT N0.126875-TZ DEFINITION OF TERMS AND ABBREVIATIONS (i) Financial Statements: Means a. Statement of Receipt and Payments, b. 'Summary of significant accounting policies and other explanatory information. (ii) Abbreviations BOT Bank of Tanzania CIDA Canadian International Development Agency ESCBP Energy Sector Capacity Building Project EWURA Energy and Water Utilities Regulatory Authority IDA International Development Association MEM Ministry of Energy and Minerals -OSHA Occupation Safety and Health Authority i'PP Public Private Partnership TANESCO Tanzania Electri·c Supply Company Limited TEITI Tanzania Extractive Industries Transparency Initiative TPDC Tanzania Petroleum E>evelopment Corporation USO United States Dollar VETA Vocational Education- and Training Authority Office of the Controller and Auditor General AR/EWURA-ESCBP/2015/2016 iv ENERGY AND WATER UTILITIES REGULATORY AUTHORITY C1'1>AC1'fY ·BU1l-D1NG PROJECT- PROJECT N0.126875-TZ ENERGY SECTOR - 1.0 BACKGROUND AND GENERAL INFORMATION 1. 1 Introduction I have audited .the special purpose financial statements of Energy Sector Capadty Building Project for the year ended 30th June, 2016. Audit findings and recommendations arising from examination of the accounting -records, appraisal of £SCBP project activities as well as evaluation of the internal control system which requires management attention and action are set out in a management let-ter issued -separately to the Chairman of the EWURA Board of Directors. 1. 2 Audit Mandate By virtue of the provisions of Articte 143 of the Constitution of the United Republic of Ta-nzania of 1977 (revised 2005) and -Sect.10 of the Public Audit Act No 11 of 2008, the -Controlter and Auditor ·General is t he statutory auditor of aH Government revenues and expenditures including the receipts and payments in the ESCBP. 1.3 Audit Objectives The main objective of .conducting this audit is to obtain reasonable assurance about whether the special ,purpose financial statements as a whole are free from material misstat ement, whether due to fraud or error, thereby enabling me to express an opinion on whether the special -purpose financial statements are prepared, in all material respects, in accordance with Project Agreement; and whether laws and regulations have been complied with. 1.4 Audit Methodology My audit approach included tests of the accounting records and other procedures in order to satisfy the audit objectives. My audit procedures included the following: • Identify and assess risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entity's internal controls of EWURA through which all the ESCBP activities financed through EWURA and paid for through the project bank account opened at the Bank of Tanzania (BOT) with account No. 9931218481 (USO -foreign-Currency Account) which is operated by EWURA. • Obtain sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed ri-sks. • Consideration of the requirements of Project Agreement, the World Bank Procurement Guidelines, . Public .Procurement Act, 2011 and Regulations, 2013 and Public Finance Act No. 6 of 2001 (Revised 2004). • Form an opinion on the special purpose financial statements based on conclusion$ drawn from the audit evidence obtained. Office of the Controller and Auditor General AR/EWURA-ESCBP/2015/2016 1 ENERGY AND WATER UTILITIES REGULATORY AUTHORITY ENERGY SECTOR CAPACITY BUILDING PROJECT- PR.QJECT N0.126875-TZ • Follow up on the impl-ementation of the pr..evious year's audit findings and recommendations to ensure that proper action has been taken in respect of all matters -raised. 1. 5 Audit Scope The audit was carried out in accordance with the international Standards on Auditing {ISA) and other audit procedures as were deemed appropriate under the circumstances. This covered the evaluation of the effectiveness of the EWURA financial accounting system and internal control over various activities of the Energy Sector Capacity Building Project. All r-eceipts and payments during the year 2015/2016 were verified. The findings are to the extent that records, documents and information requested for the purpose of the audit were made available. As auditor, I am not required to specifically search for fraud and errors, therefore, my audit cannot be -relied upon to disclose all such matters. However, my audit was planned in such a way that I would have reasonable expectations of detecting material errors and misstatements in the financial statements resulting from irregularities including fraud. The responsibility for detection, prevention of irregularities and the maint-enance of an effective and adequate system of internal control rests with the management of the EWURA. Office of the Controller and Auditor General AR/EWURA-ESCBP/2015/2016 2 ENERGY AND WATER UTILITIES REGULATORY AUTHORITY ENERGY SECTOR CAPACITY BUILDING PROJECT- PROJECT N0.126875-TZ 2.0 REPORT OF THE ENERGY SECTOR CAPACITY BUILDING PROJECT (ESCBP) 2. 1 Introduction The re.cent developments in upstream petroleum 5ubsector, where international oil and gas exploration companies are exploring for the oil and gas in Tanzania, call for both, strategic planning and capacity building so as to strengthen the capacity of the Government of Tanzania (GoT) to develop its Natural Gas sub-sector and Public Private Partnerships (PPP) for the power generation sectors. The l-egal and regulatory framework governing the natural gas industry must be in place to ensure that .environmental disasters are prevented, and facilitate adoption of international best practices in resource management. Thus, Capacity building was needed so as to enable Tanzanians to run its natural gas sub sector effectively and benefit the Nation appropriately. The Government of TaQzania {GoT) through the Ministry of Finance (MoF) and Ministry of Energy and Minera{s (MEM) approached the World Bank for financial assistance to implement the Energy Sector Capacity Building Project (.fSCBP). Out of the total USD 35 million set aside by the World Bank for implementing ESCBP, {J5D 1. 1 million is allocated to the Energy and Water Utilities Regulatory Authority (EWURA) where by 62% of the credit equivalent to USO 0.682 MHlion is credit from IOA and USO 0.418 mittion equivalent to 38% is g-rant from CIOA Trust Fund. 2. 2 MAIN OBJECTIVES OF THE PROJECT The Project Objective is mainly to strengthen the capacity of the Government of Tanzania to devefop: (i)lts natural gas sub-sector; and {ii)Public Private Partnership (PPP) for the power generation sector. To achieve these objectives, the project will finance five (5) main components; Component A: Petroleum Policy and Legal framework; Component B: Strengthening Institutional Sector Management, Coordination and Governance; Component C: Education & Skills Dev.elopment; Component D: Power Generation and Natural Gas PPP Projects Capacity Building and Component E: Project Coordination. These components are implemented jointly with MEM with beneficiary institutions which include TPDC, TANESCO, OSHA, TEITI and VETA. Implementation of these components will benefit Tanzanians both direct and indirect. Office of the Controller and Auditor General AR/EWURA-ESCBP/2015/2016 3 ENERGY AND WATER UTILITIES REGULATORY AUTHORITY ENERGY SECTOR CAPACITY BUILDING PROJECT- PROJECT N0.126875-TZ On 2Qth February, 2014, IDA declared as an effective date for the project after the borrower/Government met all preconditions stipulated in the signed Financing Agreement. The project has an account at the -Bank of Tanzania (BOT) Account Number 9931218481 which i,s operated by EWURA. 2. 3 COMPOSITION Of PROJECT MANAGEMENT TEAM All the Implementing Agencies were supposed to form a Project Management Team (PMT) which comprises of Project Coordinator, Project Procur.ernent Speciali·st and Project Accountant together with Project Steering Comm,ittee. f:WURA formed a PMT which comprises of The Project Coordinator who is responsibte for the overall management of Project activities and .c;ompliance with its objectives, Project Accountant who is responsible for accounting, financial management, and financial .reporting; and the Project Procurement Specialist responsible for -carrying out the procurement activities in compliance with the IDA procurement procedures. The implementation of EWURA activities will be under the overall coordination of Director General assisted by Project Management Team Leader who will lead -the team. Steering ,Committee members representing 'EWURA"wm be the Director General and the Director of Natural Gas. PROJECT MANAGEMENT TEAM (PMT) COMPOSITION S/No Name Position Qualifications Nationality 1. Thobias Rwelami!a Natural Gas Msc. Tanzanian Distribution (Engineering Manager ~ Management), MBA 2. Deogratius Kumalija Manager Msc. Tanzanian Procurement (Procurement Management and Logistics Management) 3. Genoveva Mponji Principal Msc. Tanzanian Revenue (Accounting Accountant and Finance) PROJECT STEERING COMMITTEE S/No Name Position Qualifications Nationality 1. Felix Ngamlagosi Director Msc. Tanzanian General (Economics) 2. Charles Omujuni Director Msc. (Natural : Tanzanian of Natural Gas Gas Engineering) Office of the Controller and Auditor General AR/EWURA-ESCBP/2015/2016 4 ENERGY AND WATER UTILITIES REGULATORY AUTHORITY ENERGY SECTOR CAPACITY BUILDING PROJECT- PROJECT N0. 126875-TZ 2.4 PROJECT FINANCING AND ITS COST ESCBP is a Technical Assistance Credit t o the Government of Tanzania and is implemented by EWURA and MEM as implementing agencies. The total financing -of this proj-ect is USS 35 Mii'tion where by USS 1.1 Mitlion is allocated to EWURA. IDA financing for EWURA in this project is USS 0.682 Million equiva{ent to 62% The project is co-financed by a CIDA Trust Fund administered by IDA. CIDA financing proportionately support all project activiti-es by 38%. Table 1: Project Financing and Cost by Component IDA Project Cost Financing % ODA Grant % Project Components (USO) (USO) Financing (USO) Financing A. Petroleum Policy and Legal Framework 200,000 .00 124 ,.000.00 62 76 ,000.00 38 B. Strengthening Institutional Sector Management, Coordination and -Governance 700,000.00 434 ,000.00 62 266 ,000.00 38 E. Project Coordination 200,000.00 124,000.00 62 76 ,000.00 38 Total Financing 1,100,000.00 682,000.00 418,000.00 2.5 PRINCIPAL ACTIVITIES The principal functions of the ESCBP are for Sub Components in Component A, B and E as per project agreement. 2:5.1 In component A, finances are in sub Components A.2 (Legal and Regulatory Framework) Activity number 3: Legal Support to EWURA's Natural Gas Division. The expected outcome of this activity is that, the regulatory framework on natural gas mid and downstream is enhanc-ed. The activities to be -financed under this part of the project include a contract for a L-e.gal Advisor to fWURA's Natural Gas Division. 2.5.2 In component B, finances are in sub Components B.2 (Enhancing Organizational Capacity) Activity number 1: Technical Advice, enhanced tariff modeling infrastructure and training for -EWURA's Natural Gas Division; and activity (2) Te(;hnical Advice, enhanced tariff modeling infrastructure for EWURA's Electricity Division; lh activity 1 Sub Component B.2: Technical Advice, enhanced tariff modeling infrastructure and training for EWURA's Natural Gas Division. Office of the Controller and Auditor General AR/EWURA-ESCBP/2015/2016 s ENERGY AND WATER UTILITIES REGULATORY AUTHORITY ENERGY SECTOR CAPACITY BUILDING PROJECT- PROJECT N0.126875-TZ The expected outcome of this activity is that the human capacity of EWURA's Natural -Gas Division and tariff modeling capacity gets strengthened and that "best practice" Transmission and Distribution (T&D) standards are establi'Shed in the .gas sector. The activities to be financed under this part of the project include a ~goods, services and training) contract that includes; (a) A Technical Advisor to EWURA's Natural Ga-s Division to; (i) Advise EWURA in development of gas quality, service standards and transmissi-0n and distribution codes, which subsequently will also be developed by the advi-ser review EWURA's exi-sting t echnical skills capacity to regulate the natural gas mid and downstream sector; (ii) Ba-sed on the capacity assessment develop a training program on capacity enhancement; (Hi) Prepare and support the procurement process including technical design of a data simulation solution for gas transmission and distribution tariff models; (-b) Acquisition of data simu!ation software and hardware for a Gas T&D Tariff Model; (c) Training of staff (in-house training conducted by Technical Advisor) in gas quality management, standards, regulations, gas production, processing, utilization and transportation; and gas projects financial Modeling. In Activity 2 Sub Component ·B.2: Economic and Technical Advice, and enhanced tariff modeling infrastructure for EWURA's Electricity Division. The expected outcome of this activity is that, a technology based feed in -tariff regulation is established, the rev,enue stream for SPP Renewable technologies development is improved and EWURA's tariff and financial modeling capacity are strengthened. The activities to be financed under this part of the project include; (i) Analyze varying requirements for individual renewable technologies eligible under the SPP framework; {ii) Recommend appropriate cost reflective feed in tariff for each technology; (iii) Assist EWURA in developing the -required regulation for SPP technology based feed-in tariffs; (iv) Advise and procure appropriate hardware and software for SPP technology based tariff models; and (v) Procurement of a SPP Feed-in Tariff Model Based on Technology Specific Cost Estimates. Office of the Controller and Auditor General AR/EWURA-ESCBP/2015/2016 6 ENERGY AND WATER UTILITIES REGULATORY AUTHORITY ENERGY SECTOR CAPACITY BUILDING PROJECT- PROJECT N0.126875-TZ In Component£ {Project Coordination), the project supports the Project Steering Committee as well as the Project Management T.eams (PMT) of Implementing Agency .(IA) which for tnis .case is EWURA. It will enhance ncial management, through the IA' s ·capacity for .pr-ocurement and lina- the provision of technkal advisory services, training, operating -costs and acquisition of goods. 2.6 PROJECT MONITORING AND EVALUATION For the financial year ended in 30th June 2016, The World Bank provi-ded No objection to EWURA to facilitate a study visit of 12 senior Tanzanians and government officials to South Africa to learn about their experience on the competitive bidding framework of renewable ene-rgy projects. The budget lor this activity amounted to USD 25,480 which is equivalent to TZS. 50,960,000.00 Under ESCBP P.r-0ject, Activity 82.2: Economic and Technical Advice, and enhanced tariff modeling infrastructure for EWURA's Electricity Division, EWURA had a budget of about US$50,000 to procure an installation software and hardware for SPP feed in tariff model and Technical Advisory for Electricity division with a budget of USD200,000. The expected outcome of this activity was that a technology based feed in tariff regulation will be established, the revenue stream for SPP Renewable techno{-ogies development will be improved and EWURA's tariff and financial modeling capacity be strengthened. The activities to be financed under the said part of the project included the following; {i) analyze varying -requirements for individual renewable technologies eligible under the SPP framework; (ii) recommend appropriate cost reflective feed in tariff for each technology; s t EWURA in developing the required regulation for SPP (iii) assi- technology based feed-in tariffs; (iv) advise and procure appropriate hardware and software for SPP technology based tariff models; and (v) procurement of a SPP Feed-in Tariff Model based on technology specific cost estimates Fortunately EWURA got Technical Assistance from USAID and hired a Consultant to review the SPP framework and propose REFiTs for Tanzania . .As a result, Feed in tariffs for Hydro and Biomass technologies were approved, while tariffs for Solar and Wihd technologies will be determined through competitive bidding. In order for £WURA to finalize developing the tendering framework of Solar and Wind SPPs, EWURA requested that funds allocated for procurement of tariff calculation models be used to facilitate a study visit to South Afrka to learn about their experience oh the competitive bidding framework of renewable energy projects. The Actual cost for this study visit to South Africa was USD 22,462 equivalent to TZS 44,924,000.00. Office of the Controller and Auditor General AR/EWURA-ESCBP/2015/2016 7 ENERGY AND WATER UTILITIES REGULATORY AUTHORITY ENERGY SECTOR CAPACITY BUILDING PROJECT- PROJECT N0.126875-TZ 3.0 STATEMENT OF MANAGEMENT RESPONSIBILITY FOR lHE YEAR -ENDED JOTH JUNE 2016 These Financial statements have been .prepared by the management of the Energy and Wat.er Utilities Regufatory Authority in accordance with the Project Agr.eement and the provisions of section 25{4) of the Public Finance Act, Cap 348 of 2008. The Management of EWURA is r.esponsible for -establishing and maintaining a system of .effective int.ernal control designed to give reasonable assurance -that the transact ions recorded in the Financial statements are within the statutory requirement and that they contain the receipts and use of resources by the Authority. To the best of the management's knowledge, the internal control system has operated adequately throughout the reporting period and the accounting and underlying records provide a reasonable basis for the preparation of the financial statements for the year ended 30th June, 201'6. Management accepts responsibHity for the integrity of the financial Statements, the information they contain and their compliance with Project Agreem.ent. Nothing has come to the attention of the Management to indicate that Energy Sector Capacity Building Project will not remain W'going -concern f or at least the next twelve months from the make them comparable with current year's figures. 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