Project Appraisal Document - IHDP

Executive SummaryPUTTALAM HOUSING PROJECTAnnex 7: Financial Management Assessment ReportThe Ministry of Resettlement would have primary responsibility for financial management. ThePPU an autonomous unit under the Ministry would carry out all project-related financialmanagement activities and would ensure that the financial management arrangements areimplemented to the satisfaction of the Ministry and IDA through the duration of the PHP.The overall Financial Management arrangements of the PHP would be satisfactory once thespecified weaknesses are addressed. The manual systems established by the PPU would provide,with reasonable assurance, accurate and timely information on the financial operations of theproject. The PHP accounting procedures would be governed by the government regulations andthe project Financial Management Manual. The PHP would be subject to a continuous internalaudit by independent government internal auditors. The Auditor General’s Department or an auditfirm nominated by the Auditor General and acceptable to IDA would carry out the year-endexternal audit.A Special Dollar Account (S DA) would be set up and maintained at the Central Bank of SriLanka which would make payments requested by the PPU. The replenishment of the SDA wouldbe done according to the transaction-based disbursement procedure.Country IssuesThe Country Financial Accountability Assessment (CFAA) for Sri Lanka published in June 2003,highlighted gaps and weaknesses in the institutional framework for the financial management ofpublic resources. The assessment covered a range of processes including financial managementand reporting practices at the three levels of government, the public audit and the parliamentarycontrol of public funds.One weakness identified in the CFAA was that the Project Financial Management framework wasnot designed to encourage a performance-oriented culture. The framework lacked mechanisms tomonitor outputs and outcomes of government expenditure. The budget process was input-focusedand relied upon rigid economic classifications of expenditure. The Financial Regulations did notfocus on controls that promote accountability for performance. The present governmentaccounting system ‘CIGAS’ relied on the economic classification of expenditure used forbudgeting but did not go down to lower levels of classification.To instill a performance-based culture in the project, project management is encouraged tomonitor financial progress against physical progress, always ensuring that the funds are spent onintended purpose, economically and efficiently. Due to the weakness identified in the governmentaccounting system ‘CIGAS’, the PHP would use a manual system with a chart of accountsdesigned to capture all types of information supplemented by a simple database to maintaindetailed information required for project management.49