Republic of Malawi MINISTRY OF AGRICULTURE, IRRIGATION AND WATER DEVELOPMENT AGRICULTURAL COMMERCIALISATION PROJECT (AGCOM) PROJECT ID NO: P158434 IDA CREDIT NO: 60480-MW Project Financial Statements For the year ended 30 June 2019 National Audit Office P 0 Box 30045 Lilongwe TABLE OF CONTENTS CONTENTS PAGE Contiolling Officer's Report 1 Statement of Management's Responsibilities 4 Independent Auditor's Report 5 Statement of Financial Position 8 Statement of Receipts and Payments 9 Designated Account Activity Statement 10 Notes to the Financial Statements 11 MINISTRY OF AGRICULTURE, IRRIGATION AND WATER DEVELOPMENT AGRICULTURAL COMMERCIALISATION PROJECT (AGCOM) PROJECT ID NO: P158434 AND IDA CREDIT NO: 60480-MW FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2019 CONTROLLING OFFICER'S REPORT FOR THE YEAR ENDED 30 JUNE 2019 1.0 Introduction The Ministry of Agriculture, Irrigation and Water Development is implementing the Malawi Agriculture Commercialization Project (AGCOM) with funding from the International Development Agency (IDA) amounting to US$95 million million (i.e. SDR70,100,000). The Project was approved on 23rd May 2017 while the Financing Agreement (FA) was signed on 2nd February 2018. The Project was declared effective on 1st June 2018. The closing date of the Project is 31st May 2023 while the disbursement deadline date is 30th September 2023. 1.2 Project Development Objective (PDO) The Project Development Objective (PDO) is to increase commercialization of agriculture value chain products selected under the project. The PDO refers explicitly to value chain products selected under the project because the value chains to be supported are not determined in advance; AGCOM is purposely designed to allow the market to decide which value chains and buyers have strong prospective commercial linkages. This approach will prevent the project from confining its impact at the outset to a small number of producers in particular value chains. Agricultural value chain products are products of farms and agribusinesses, including crop, livestock, and fisheries products sold domestically or exported, with or without processing, depending on market requirements. Commercialization refers to the proportion of marketed production from targeted farms and the proportion of marketed agribusiness products from the selected value chains. 1.3 PDO level indicators The following Project indicators measure progress toward the PDO i. Increase in yield of selected commodities by producer organizations participating in productive alliances (crops, livestock, and fisheries, etc.) ii. Selected agricultural value chain products linked to markets iii. Producer groups that meet market specifications defined by off-takers (% of members women) Increased value of gross sales by producer groups for products of agricultural value chains supported by the project 1.4 Project Components The above PDO are being achieved through the Project's four components, namely: 1 MINISTRY OF AGRICULTURE, IRRIGATION AND WATER DEVELOPMENT AGRICULTURAL COMMERCIALISATION PROJECT (AGCOM) PROJECT ID NO: P158434 AND IDA CREDIT NO: 60480-MW FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2019 i. Building Productive Alliance. This component is supporting integration of small-scale, emerging farmers (defined as farmers cultivating not more than 8 ha) into value chains by improving their capacity to finance and execute productivity-enhancing investments and respond to the requirements of end-markets and buyers (off-takers). ii. Support Investment Enabling Services. This Component is focusing on organisation of Producer Organizations (POs), development of Productive Alliances (PAs), and advance access to markets (especially for mature PAs). Further this component is supporting improvements and trade environment that will both deepen and sustain market linkages and improve financing for PAs and POs. iii. Contingency Emergency Response. This Component focuses on establishment of a disaster recovery contingency fund that is triggered in the event of an eligible natural or human-induced crisis or emergency that has had (or is likely to have) major adverse socio-economic impacts during the life of the project. iv. Project Coordination and Management. This Component is financing and coordinating project implementation. 1.5 Key achievements during the year under review The project's efforts and focus were mainly directed towards established of systems and structures during this first year. During the year under review, the Project made the following notable achievements: i. One major activity undertaken in the period under review involved setting up project systems and the development of Operational Manuals, guidelines and Terms of References (TORs) to guide project implementation and implementation of specific activities. The systems and structures established so far include the setting up of Project offices, Project Steering Committee (PSC), Project Technical Committee (PTC), development of manuals such as Financial Management Manual, Matching Grants operational manual, Partial Credit Guarantee (PCG) manual, Grievances Redress Mechanism (GRM) Manual, Contingent Emergency Response Component Manual, Finance Management, Monitoring and Evaluation systems and procedures manuals. Independent Evaluation Committee (IEC) for proposals, Investment Committee (IC) for Partial Credit Guarantee (PCG) were also set up; ii. A number of procurements were initiated out of which some were completed while others are ongoing. Recruitment of the Project Specialists was amongst the major completed procurements. During the period under review, the Project recruited the National Project Coordinator and 15 Specialists, out of which 13 specialists are for AGCOM PIU while 2 specialists are for Land Reform Implementation Unit; iii. Sensitization meetings were conducted across the country with diversity of stakeholders along the agriculture value chain which included four Regional Sensitization meetings and two meetings with off takers (i.e. buyers); 2 MINISTRY OF AGRICULTURE, IRRIGATION AND WATER DEVELOPMENT AGRICULTURAL COMMERCIALISATION PROJECT (AGCOM) PROJECT ID NO: P158434 AND IDA CREDIT NO: 60480-MW FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2019 iv. AGCOM Call for Concept Notes was first announced on 28th June 2019 following the development of Concept Note Application guidelines and establishment of the Independent Evaluation Committee (IEC) to evaluate concepts and proposals and Matching Grant Manual to guide the Independent Evaluation Committee; and v. A cumulative Budget of USD3,863,008, that is USD3,277,771 and USD 585,237 for the first six months (July 2018 to December 2018) and the last six months (January 2019 to June 2020) respectively was approved by World Bank. USD3,277,771 out of USD95 million was disbursed and advanced to the designated account representing disbursement rate of 3.45%. USD1,229,176 was spent and documented in World Bank Client Connection (Web based Portal) representing absorption rate of 23% of the disbursed amount and utilization rate of 32% of the approved budget. CERC was activated which resulted into the availability of USD20 Million for rehabilitation of damaged Irrigation Schemes and feeder roads and procurement of about 40,000 metric tons of maize in the coming financial year. The AGCOM PIU implemented key activities as well as fiduciary activities (including the management of finances and associated checks and balances, procurement contract management) with full oversight support provided by the members of the Project Technical Committee, Project Steering Committee, Ministry of Agriculture, Irrigation and Water Development and other implementing agencies such as Ministry of Industry, Trade and Tourism, MITC and MBS. Agricultural Commercialisation Project (AGCOM) 2 4 DEC 2019 P.O. Box 30134 Capital City, Lilong1 3 GRAY V.K NYANDULE PHIRI SECRETARY FOR AGRICULTURE, IRRIGATION AND WATER DEVELOPMENT 3 Responsibilities of Management for the Project's Financial Statements The Management of Agricultural Commercialization Project (AGCOM) is responsible for the preparation and fair presentation of the financial statements in accordance with International Public Sector Accounting Standards (IPSAS) Financial Reporting under the Cash Basis of Accounting, Donor terms of agreement and financial provisions, and for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. This responsibility includes designing, implementing and maintaining internal controls relevant to the preparation of the financial statements that are free from material misstatements, whether due to fraud or error. Auditor's Responsibilities for the Audit of the Project's Financial Statements My objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards of Supreme Audit Institutions (ISSAls) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these Project's Financial Statements. As part of an audit in accordance with ISSAls, I exercise professional judgment and maintain professional scepticism throughout the audit. I also: * Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. * Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. * Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. I communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that I identify during my audit. 1 also provide those charged with governance with a statement that I have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on my independence, and where applicable, related safeguards. 6 STATEMENT OF FINANCIAL POSITION AS AT 30TH JUNE 2019 Note MWK USD Assets Non-Current Assets Property, Plant & Equipment 8.0 89,555,800 124,834 Project Operating Costs 9.0 678,008,518 1,104,342 Total Non-Current Assets 767,564,317 1,229,176 Bank Balances 3.0 1,583,905,321 2,048,595 Stocks -_- Total Current Assets 1,583,905,321 2,048,595 Total Assets 2,351,469,638 3,277,771 Financed By: World Bank IDA Financing 4.0 2,351,469,638 3,277,771 Total Financing 2,351,469,638 3,277,771 Project (AGCOM) 2 DEC 2019 . P.O. BoX 30134. Capital City, Llongwii Secretary for Agriculture: Mr. Gray V.K Nyandule Phiri National Project Coordinator (AGCOM) Teddie Nakhumwa, PhD.......................... ........ Financial Management Specialist (AGCOM) Mr. Boddingtone Munyenyembe..... 8 STATEMENT OF RECEIPTS AND PAYMENTS FOR THE YEAR ENDED 30 JUNE 2019 June 2019 June 2019 Note MWK USD RECEIPTS Direct Payments 0 0 World Bank IDA Advance Receipts 2,351,469,638 3,277,771 Total Receipts 2,351469,63277.771 PAYMENTS Establishment of Producer Org. and 199,716 Productive Alliances 143,275,707 Consulting Services to Producer 30,006 Organizations 21,526,040 Facilitate access to land for actors in 306,557 Agric.Value Chain 219,923,487 Facilitate access to Business Enabling 67,265 Services for Agribusiness and Farmers 48,255,711 Project Management, Activities oversight 584,164 and Results 419,078,572 41,470 Sectoral and cross Sectoral Coordination 29,750,468 Exchange gains/losses 2.0 (114,245,669) 0 Total Expenditure 1,229,17 Cash Surplus/(Deficit) at the end of the 1.583,905,321 2,048.595 Year 9 DESIGNATED ACCOUNT ACTIVITY STATEMENT BANK ACCOUNT NUMBER: 0013006240193 MK USD RECEIPTS Opening balance 0 Cash Receipts 2,351,469,638 3,277,771 Less Transfers to Operating Account (932,618,700) (1,300,000) TOTAL RECEIPTS 1,418,850,938 1,977,771 PAYMENTS Bank Charges (10,761) (15) TOTAL PAYMENTS (10,761) (15) SURPLUS 1,418,840,177 1,977,756 10 NOTES TO THE FINANCIAL STATEMENTS 1.0 ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these project financial statements are set out below: - 1.1 Basis of preparing the Financial Statements The Financial Statements have been prepared using the historical cost convention and in accordance with International Public Sector Accounting (IPSAS) with particular emphasis on cash basis financial reporting under the cash basis accounting. The cash basis accounting recognizes transactions and events only when cash is received or paid by the project. All receipts and payments received and made in the period are reflected in the financial statements. 1.2 Foreign Currency Translation/Exchange gains/(Losses) Foreign currency translation for income and expenditure account items are converted using the actual exchange rate at the date of draw down. All local expenditures paid from the local accounts/currency are translated back to the US Dollar at the actual rate at which draw-down was converted at date of transfer from special account to local account. Where the expenditure cannot be fully met from the proceeds of a draw down, and part of the expenditure should be met from the proceeds of the subsequent draw down, which may have come at a different rate, the conversion rate of the total expenditure from the local currency to the US dollar is on First in First out (FIFO) basis. Thus, the preceding draw down should be exhausted before the subsequent draw down. Current assets and special fund balances are translated using the rate at the closing date (Closing Rate Method). The closing exchange rate to one US Dollar was MK775.1643 as at 30th June 2019. 2.0 Foreign Exchange Gain/Loss Designated Account Balances in Exchange Description USD Rate Closing Designated Account Balance in $ as per Bank Rec 1,977,756 Closing Designated Account Balance in MK as GL using drawn down rate 1,418,840,177 717.3990 Translated DA closing Balances in MK using Closing exchange rate 1,533,085,845 775.1643 Exchange Gains/(Losses) (114,245,669) 11 3.0 Bank Balances The bank balances are the amounts that remained in the bank balances as at 30 June 2019 for the three project bank accounts, namely, Foreign Currency Denominated Account, and Local Currency Denominated Account both of which are held at Reserve Bank of Malawi and the NBS (CCA) Operating Account. The breakdown of bank balances is as follows: Closing Balance Closing Balance Account No. Account Name Bank (1VWK) (USD) Foreign Currency Denominated Reserve Bank of 13006240193 Account Malawi 1,533,085,845 1,977,756 Local Currency Denominated Reserve Bank of 13006240191 Account Malawi 50,819,476 70,839 Operating 18444321 Account NBS Bank Ltd - - Total 1,583,905,321 2,048,595 4.0 Receipts The receipts represent funds received from the World Bank. Income is recognized on receipt basis. Funds are deposited into the Foreign Currency Designated Account with the Reserve Bank of Malawi from where transfers are made to the Local Currency (MK) Designated account (LCDA). The LCDA acts as a holding account and is electronically linked to the NBS Credit Ceiling Authority (CCA) operating account. During the year receipts from World Bank were as follows: % of cumulative disbursed amount Original Disbursed against Approved Disbursed Amount to original Loan Disbursement Amount to 30th June approved Amount in Reference Disbursement Disbursement 30th June 2019 in loan amount USD No. Type date 2019 in MK USD in USD 1st Advance to RBM WA- Designated 95,000,000.00 AGCOM- 01 Account 12 Sep 2018 2,351,469,638 3,277,771 3.45 Total 2,351,469,638 3,277,771 3.45 12 5.0 Payments Project payments are done in both foreign currencies and Malawi Kwacha through the Foreign Currency (USD) Designated Account and the NBS Credit Ceiling Authority operating account. Costs are recognized on actual payments. Foreign currency payments are accounted for at the exchange rate prevailing at the date of payment. Principal authority in translating the currency is the Reserve Bank of Malawi. 6.0 Depreciation Depreciation is not charged on assets when the Cash Basis method is used. The objective is to show how project funds have been utilized. 7.0 Taxation The Project costs funded under IDA Credit No 60480 - MW are "inclusive of taxes according to the Financing Agreement. 8.0 Property Plant & Equipment Property, Plant and Equipment are expensed in the project's books of accounts in the year of purchase and shown in the notes to the financial statements at the cost to the Project. The cost is the amount of funds actually paid. The breakdown of the cost of Property, Plant and Equipment for the year under review is as follows: MK USD Motor Vehicles (0) (0) Office Furniture 22,731,043 31,685 Office Equipment 56,572,757 78,858 Genset 10,252,000 14,291 Total non-Current Assets 89,555,800 124,834 9.0 Operating Costs Total Expenses for the year 767,564,316 1,229,176 Total Assets 89,555,800 124,834 Operating Costs 678,008,517 1,104,342 13 APPENDICES Appendix I Statement of Budget Comparison with Actual Expenditure Explanations to Budget Period: (July 2018 - June, 2019 Budget Variances MWK MWK MWK % of Actual COMPONENTS/SUBCOMIPO Approved Budget against NENTS/ACTIVITIES Actual Budet Variance Budget Building Productive Alliances 229,721 548,419 318,698 42 Establishment of Producer organizations and Productive Alliances (Horizontal Alliances) 199,716 495,906 296,190 40 Communication Campaigns 179,320 406,340 227,020 44 Communication strategy 10,590 71,548 60,958 15 Call for proposals & Capacity Building for Productive Alliances 9,805 18,018 8,213 54 Consulting Services to Producer organizations (Productive Alliances) 30,006 52,513 22,507 57 Consulting Services to Producer organizations 20,404 25,487 5,083 80 Sub Project Grants to Producer organizations - 18,017 18,017 - The over expenditure arose due to the technical nature of PCG evaluation which necessitate the evaluators to spend more days to produce the technical evaluation report Provision of Partial Credit than the budgeted Guarantees (PCG) 9,602 9,009 (593) 107 days. 14 Last Mile Infrastructure Investments - - - - Feasibility Assessment of Last Mile Infrastructure - - - - Investments in small scale irrigation infrastructure - - - - Investment in last mile rural feeder roads - - - - investments to improve access to electricity - - - - Investment to improve access to water - - - - Support Investment Enabling Services 373,822 1,446,821 1,072,999 49 2.1: Strengthening Warehouse Receipt System (WRS) Financing - 9,009 9,009 - 2.1.1: Engagement of a Consultant to conduct assessment of the current WRS and develop interventions/solutions 9,009 9,009 2.1.2: Setting up and operationalization of insurance and/or an Indemnity Fund to protect the value of stored commodities from various risks - - - - 2.1.3: Strategies for increasing farmers and SMEs access to Warehouses in Rural Areas - - - - 2.1.4: Implementation of Interventions/Solutions identified from WRS Study 2.1.5: Facilitate the development of warehouse receipt system standards (Support to MBS)- Review of standards, initial inspection, and surveillance, quality audits and certification - . . . 2.1.6: Strengthening the capacity of MBS through procurement of Testing Equipment for Laboratories - - - - Facilitate access to land for actors in Agriculture Value Chain 306,557 1,135,957 829,400 27 One MVs procured, delivered 2.2.1 - Land Reform but direct payment Implementation Unit (LRIU) 77,034 590,756 513,722 13 not completed by 15 30th June 2019 while various Equipment not procured 2.2.2 - Public Engagement 9,350 138,673 129,323 7 2.2.3 - MoLHUD Capacity Building & Institutional Development 162,274 246,249 83,975 66 2.2.4 - Office Infrastructure, Equipment and Furniture 33,405 61,000 27,595 55 2.2.5 - Management of Lands Records/Design, Develop and organizations an Interoperable Land Information System 24,494 86,040 61,546 28 2.2.6 - Strengthening of MITC - 13,239 13,239 - 2.2.7 Gender Strategy - - - Facilitate access to Business Enabling Services for Agribusiness and Farmers 67,265 301,855 234,590 22 Support Public Private Dialogue Forums and Agribusiness Task Force 36,660 56,361 19,701 65 TWG Meetings on Business Reforms 13,356 89,330 75,974 15 Support to TWG for TPSWAP - - - - Support National Trade Facilitation Secretariat - - - - Two MVs procured, delivered but direct payment Business Environment and Inter- not completed by Agency Coordination 17,249 156,164 138,915 11 30th June 2019. Contingent Emergency Response --- Response to eligible crisis and emergency -_-_- Project Management & Coordination 625,634 1,867,768 1,242,134 33 4.1 Project Management, Activities oversight and Results 584,164 1,793,133 1,208,969 33 4.1.1: Technical Assistance & Consultancies 249,277 357,424 108,147 70 16 4.1.2: Project Planning, Monitoring and Evaluation 75,888 236,149 160,261 32 4.1.3: Finance and Audit 13,470 85,148 71,678 16 4.1.4: Procurement 53,442 74,575 21,133 72 Twelve MVs procured, delivered but direct payment 4.1.5: Office Equipment, not completed by furniture and Vehicles 75,482 808,860 733,378 9 30th June 2019. 4.1.6: Office running costs 38,326 147,077 108,751 26 4.1.7: Vehicle and Genset running costs 78,280 83,900 5,620 93 4.2 Sectoral and cross Sectoral Coordination with key Sector Agencies 41,470 74,635 33,165 56 4.2.1: Project Implementation Supervision 7,435 10,314 2,879 72 4.2.2: Project Steering Committee (PSC) meetings 21,010 21,861 851 96 3 out of the budgeted 4 PTC Meetings took place. The 4th one postponed to next 4.2.3: Project Technical quarter (July 19 to Committee (PTC) meetings 13,024 42,460 29,436 31 Sept 19) TOTALS 1,229,176 3,863,008 2,633,832 32 7(0) 17 17