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Financial Management

and Administration
Manual FOR IFAD STAFF AND CONSULTANTS
Financial Management
and Administration
Manual FOR IFAD STAFF AND CONSULTANTS

The Financial Management and Administration Manual (FAM), along with the exhibits,
is intended as a guide for IFAD staff and consultants on various aspects of financial
management and administration. It is intended for use together with IFAD’s basic legal texts
and individual financing agreements.

The FAM is periodically updated to incorporate new guidance, as and when released.

The Financial Management and Administration Manual (FAM) was disseminated to IFAD staff
by the Director, Financial Management Services Division, on 26 September 2016. A revised
version was subsequently issued in June 2017.

Update – July 2018


Financial Management and Administration Manual

Interim inclusion in July 2018 version pending document design.


th
Effective date 8 February 2019.

Ineligible expenditure.

Where feasible, IFAD encourages use of measures (remedies) for managing B/R noncompliance so as to
minimise the disruptive impact on project implementation to the extent possible. The application of such
measures is intended to reduce the likelihood and frequency of suspension measures.

As per IFAD procedures, all identified cases of ineligible must be duly recorded, monitored and efforts made to
seek refunds in all cases. In practice, the context and impact of pursuing measures may outweigh the
materiality of the breach and cost-effectiveness of the course of action. On this basis Finance Officers are
encouraged to consider a broader toolkit of measures as a first recourse, as provided in the threshold based
approach outlined below:

Threshold Proposed / Applicable remedies Impact / Considerations


Deductions from different categories
1. An amount equivalent to the identified will lead to delays in processing the
Low value ineligible expenditure to be deducted from WA and additional workload to
the subsequent WA. transfer costs between categories,
this remedy must therefore be
carefully considered.

2. B/R to refund an equivalent amount in the See Module H.4 Par. 51.
designated account or directly to IFAD.

3. B/R requested to provide substitute This remedy is limited to substitution


documentation, evidencing other of documentation / expenditures
Investment expenditures that meet IFAD’s eligibility within the same loan/grant facility.
projects: criteria.

Changes to the SOE thresholds or


<=USD100,000 4. Finance Officer to impose a reduced SOE permitted disbursement mechanisms
(or equivalent) threshold or, for applicable projects the will require an LTB/R modification. In
report-based disbursement method may be parallel the Finance Officer may
temporarily frozen. consider a change in the FM risk
or rating of the project.
5. Change to permitted disbursement modality,
either temporarily or for the remaining Changes to permitted disbursement
lifetime of the project - discontinue use of the mechanisms will require an LTB/R
Global/regional
DA mechanism (could be at executing modification.
and
agency level) for ongoing or new projects
Institutional
(the latter in case of expired loans for more
grant:
than 3 months).
This measure will limit the disruptive
<=USD50,000 6. Repayment of outstanding ineligible impact on the ongoing project,
expenditure from ongoing loan/grant to be however it may cause delays to start-
built into conditions precedent to withdrawal up of new projects.
for new loan/grant agreement.

As provided for in GC section 12.02


7. Cancel an equal amount from the remaining (iv).
amounts in the loan and/or grant accounts.

Any of the above described measures can be applied to the higher value threshold, as
deemed applicable.
High value
Further advances may be withheld
8. Temporarily ‘freeze’ disbursements. until the DA has been restored to its
proper level or documentation on
Financial Management and Administration Manual

Interim inclusion in July 2018 version pending document design.


th
Effective date 8 February 2019.

other eligible expenditure has been


submitted.
This is not formal suspension of the
B/R’s right to request withdrawals
Investment from the Loan and/or Grant
projects: Accounts, and therefore delays in
effective resolution should be
escalated.
>USD 100,000
9. Impose temporary delay / postponement of
approval of amendments to the Financing
or Agreement.

Global/regional Where clear commitment is shown on


and the part of the B/R to refund the
Institutional outstanding amount, however a delay
grant: may be experienced due to certain
10. Delay all remedies subject to an agreed
factors outside of the control of the
'settlement plan' of no longer than 3 months
B/R, a ‘settlement plan’ may be
(90 days), following which formal remedy
>USD 50,000 agreed upon for a limited time period
processes will start.
(up to 3 months). Failure to honor the
plan will result in roll-out of formal
remedial procedures, as deemed
appropriate.
11. 90 days after breach identification: Issue
warning notice, with reference to potential
application of remedies, including
suspension. 180 days maximum tolerance
(as per GC 12.01 (b)), after which the case
summary and remedy proposal to be
submitted to EMC for consideration.
12. Component-specific and/or Category-
specific, or Project suspension.
In case of suspension, the Fund may also:
a. Delay negotiations and/or board
presentation and/or signing of any new As provided for in GC section 12.01.
loan benefitting the noncompliant entity;
b. Declare Acceleration of Maturity (based
on GC 12.05)
Existing remedies, except for point (a) which
is being proposed.
13. Cancel in whole or in part the undisbursed
As provided for in GC section 12.02
amounts in the Loan and/or Grant Accounts,
(iv).
as per GC Section 12.02(a)(iv)
14. For non-country grants, failure to comply
with provisions of IC/CFS/03/2011 will result
in the recipient being blacklisted
15. (At closure) If there are unjustified obligations of less than USD 50,000 (or the equivalent), the amount of
such obligations will be accounted under a dedicated category identifiable as unjustified expenditure. A
revised amortization schedule will be prepared in accordance with the usual procedure. (FAM J.3 para.
12(c).
Contents
Exhibits
Abbreviations and acronyms
Definitions
Introduction
Enquiries/where to go for help

Module A
Principles of financial management and administration

Module B
Types of financing

Module C
IFAD project cycle overview

Module D
Financial management at project design and approval

Module E
The financing agreement and its negotiation process

Module F
Changes during implementation

Module G
Project supervision and financial management

Module H
Withdrawal and disbursement

Module I
Audit and financial reporting requirements

Module J
Loan repayments and debt servicing

Module K
Financial management and disbursement of grants

Module L
Supplementary Funds, Thematic Trust Funds and Funds from other IFIs

Module M
Key documents

Module N
Document retention
Exhibits
President’s bulletins, information circulars, checklists, templates
A-1 Information Circular IC/FOD/03/2012 FM resources for IFAD-funded
projects and programmes
A-2 President’s Bulletin PB/2016/02 Strengthening the Financial Operations
Department – realignment of the Controller’s and Financial Services Division
B-1 President’s Bulletin PB/2014/01 Plus /Rev.1 Additional financing
B-2 Policies and Criteria for IFAD financing
B-3 Guidance note on Single Currency Lending
C-1 Fiduciary Summary of the Country Portfolio
C-2 FMD Quality Assurance Procedures
C-3 President’s report (fiduciary template)
C-4 Information Circular IC/FOD/02/2013 Standard expenditure categories
C-5 Information Circular IC/FOD-PMD/01/2012 Revised IFAD loan and
grant management business model and interdepartmental cooperation
framework
D-1 Summary of Project Fiduciary Risk Assessment at Design (table)
D-1/A Detailed FMAQ Project Fiduciary Risk Assessment at Design
D-2 Summary of Financial Arrangements (annex 7)
D-3 Checklist for evaluating project accounting software
D-4 Risk Based Assurance Framework Methodology
E-1 Model Financing Agreement
E-2 Guidance Note – Retroactive Financing
E-3 Suspension Notice (unjustified obligations) 90 days
E-4 Suspension Notice (unjustified obligations) 180 days
E-5 Suspension Lifting Advice
E-6 Letter to the borrower/recipient (LtB/R)
E-7 Revisions to the LtB/R
G-1 Checklist for statement of expenditure (SOE) review
G-2 Detailed FMAQ Project Fiduciary Risk Assessment at Supervision
G-3 Summary of Project Fiduciary Risk Assessment at Supervision
G-4 Sample consultant TORs
G-5 Mission preparation – useful documentation and information
G-6 Checklist for review of interim financial reports
G-7 Minimum requirements for interim financial reports
G-8 Guidance Note – Payment of Final Disbursement
H-1 Risk-based disbursement guidelines (ex post)
H-2 Risk-based disbursement guidelines (ex ante)
H-3 Smart SOE forms
H-4 Decision Memo–Proposal for the abolishment of Special Commitment
Letters payment method
I-1 Conceptual Framework for Financial Reporting
I-2 IFAD Handbook on Financial
I-3 Assessment of national/regional accounting and auditing standards
I-4 Guidance note on Interim Financial Reports
I-5 Auditor assessment criteria (Criterios de evaluación del auditor)

v
I-6 Guidance note on assessing capacity of SAIs
I-7 Initial warning notice (90 days)
I-8 Suspension letter (180 days)
I-9 Ilustrative tabke for audit report suspension
I-10 Peer review selection criteria
I-11 Guidance note on Performance Scores
I-12 Guidance for disclosure of audit reports
J-1 Historic IFAD lending terms
J-2 Arrears notice
J-3 Arrears suspension notice
K-1 Checklist of fiduciary due diligence for IFAD grants
K-2 Guidance on sub-recipients
K-3 Guidance on Eligible Expenditure Categories and Budget Justifications
K-4 Assessment of FM Risk Associated with Recipients and Projects
K-5 FMAQ (summary sheet and data sheet)
K-6 Ex ante review for WAs
K-7 Ex post review for WAs
K-8 Information Circular IC/CFS/03/2011 Internal procedures to close an
expired grant to a non-government recipient
L-1 Financial and Administrative Framework Agreement (FAFA)
L-2 Pillar-Assessed Grant or Delegation Agreement (PAGoDA)
L-3 President’s Bulletin PB/2014/08 Procedures for supplementary funds and
GEF-administered grants
L-4 President’s Bulletin PB/2013/12 Principles and procedures for mobilizing
and managing supplementary funds
N-1 President’s Bulletin PB/2012/04 Records management manual
N-2 Information Circular IC/ADM/02/2011 Introduction of a paperless workflow
for incoming, outgoing and internal correspondence

vi
Abbreviations and Acronyms
AA Authorized Allocation
ACD Accounting and Controller’s Division (IFAD)
AFS Audited Financial Statement(s)
ARTS Audit Report Tracking System
ASAP Adaptation for Smallholder Agriculture Programme
AUO Office of Audit and Oversight (IFAD)
AVP Associate Vice-President
AWP/B Annual Workplan and Budget
B/R Borrower/Recipient
CFS Controller’s and Financial Services Division (IFAD – now ACD and FMD)
CGIAR Consultative Group on International Agricultural Research
CI Cooperating Institution
COSOP Country Strategic Opportunities Programme
CPI Corruption Perceptions Index (Transparency International)
CPM Country Programme Manager
CPMT Country Programme Management Team
CSO Civil Society Organization
DA Designated Account
DO Disbursement Officer
DSF Debt Sustainability Framework
EC European Commission
EMC Executive Management Committee
EU/EC European Union/European Commission
EUR Euro
FA Financing Agreement
FAM Financial Management and Administration Manual
FM Financial Management
FMA Financial Management Assessment
FMAQ Financial Management Assessment Questionnaire
FMD Financial Management Services Division (IFAD)
FMDB Financial Management Dashboard
FMR Financial Monitoring Reporting
FMS Financial Management Specialist
FO Finance Officer
FOD Financial Operations Department (IFAD)
FXC FlexCube
GC General Conditions for Agricultural Development Financing
GEF Global Environment Facility
GRIPS Grants and Investment Projects System
IC Information Circular
ICP IFAD Client Portal
IFI International Financial Institution
IFR Interim Financial Report
IFRS International Financial Reporting Standards
IMF International Monetary Fund

vii
INTOSAI International Organisation of Supreme Audit Institutions
IOE Independent Office of Evaluation of IFAD
IPSAS International Public Sector Accounting Standards
ISA International Standards on Auditing
ISSAI International Standards of Supreme Audit Institutions
IT Information Technology
LDH Loan Disbursement Handbook for IFAD Directly Supervised Projects
LEG Office of the General Counsel (IFAD)
LOT Lapse-of-Time
LPA Lead Project Agency
LtB/R Letter to the Borrower/Recipient
M&E Monitoring and Evaluation
MDB Multilateral Development Bank
MTR Midterm Review
NGO Non-Governmental Organization
NPV Net Present Value
OSC Operational Strategy and Policy Guidance Committee
PB President’s Bulletin
PBAS Performance-Based Allocation System
PCR Project Completion Report
PDR Project Design Report
PEFA Public Expenditure and Financial Accountability
PFM Public Financial Management
PFR Project Fiduciary Risk
PIM Project Implementation Manual
PIU/PCU/PMU Project Implementation/Coordination/Management Unit
PMD Programme Management Department (IFAD)
PSR Project Status Report
QA Quality Assurance
QAG Quality Assurance Group
QE Quality Enhancement
ROSC Report on the Observance of Standards and Codes
RSP Rural Sector Performance
SAI Supreme Audit Institution
SC Special Commitment
SDR Special Drawing Right(s)
SEC Office of the Secretary (IFAD)
SOE Statement of Expenditure
STF Spanish Trust Fund Facility (Spanish Food Security Cofinancing Facility)
TORs Terms of Reference
TRE Treasury Division (IFAD)
US$ United States dollar(s)
WA Withdrawal Application

viii
Definitions
1. Borrower. A Member State that receives a loan is called the borrower.
A political subdivision of a Member State may be designated as the borrower,
but in this case the Member State must act as guarantor.

2. Recipient. A Member State or other entity that receives a grant is called the
recipient. If the Member State receives both a loan and a grant, it is referred to
as the borrower/recipient. The General Conditions for Agricultural Development
Financing uses the term borrower/recipient in all cases in which a provision
applies to both loans and grants to Member States.

3. Guarantor. A Member State designated as such in a guarantee agreement.

4. Guarantee agreement. An agreement between a Member State and the


Fund by which such Member State guarantees the performance of another
agreement.

5. Project. Throughout the text of this manual, project refers to both projects
and programmes.

6. EU-funded grant means a grant funded by the European Union and


administered by IFAD. Such a grant may be provided on a stand-alone
basis or in combination with a loan/grant to an Investment Project.

7. Public Auditor means an SAI or other public office entrusted with public
audit responsibilities.

8. Grant means a grant financed by IFAD that is subject to the Policy for Grant
Financing1 and grants financed by supplementary funds2 as follows:
• Type A grants, which are:
i. Large grants (greater than and including US$500,001 or equivalent) that
are assessed as medium or high risk, as determined by IFAD;
ii. Small grants (up to and including US$500,000) that are assessed as high
risk, as determined by IFAD;
iii. EU-funded grants (regardless of amount or risk).
• Type B grants, which are:
i. Large grants (greater than and including US$500,001 or equivalent) that
are assessed as low risk, as determined by IFAD;
ii. Small grants (up to and including US$500,000 or equivalent) that are
assessed as medium or low risk, as determined by IFAD;
• Type C grants, which are grants of any amount provided to United Nations
agencies and Multilateral Development Banks.

1 As approved by the Executive Board at its 114th session of 22 and 23 April 2015.
Although subject to the Policy, contribution agreements, including micro-grants (up to and
including US $75,000 or equivalent) are not subject to financial reporting and audit requirements as
per the Handbook.
2 Grant-based resources from a donor received and administered by IFAD. Any specific
provisions required by the donor in relation to financial reporting and auditing are reflected in
the grant agreement.

ix
Acknowledgements
The revision of the Financial Management and Administration Manual (FAM) was
prepared under the leadership of the Director, Financial Management Services
Division (FMD). The Director would like to thank IFAD management and staff from
various divisions, namely the Office of the General Counsel (LEG), Programme
Management Department (PMD), Accounting and Controller’s Division (ACD),
Partnership and Resource Mobilization Office (PRM), Quality Assurance Group
(QAG), Communications Division (COM), and of course FMD staff, for taking the
time to review the various drafts and for their invaluable feedback.

xi
Introduction
The Agreement Establishing IFAD states, “The Fund shall make arrangements to
ensure that the proceeds of any financing are used only for the purposes for which
the financing was provided, with due attention to considerations of economy,
efficiency and social equity” (article 7(1)(c)). This Financial Management and
Administration Manual (FAM) describes the principles and procedures for project
financial management and disbursement applied by the International Fund for
Agricultural Development (IFAD or the Fund) to implement such arrangements. The
manual is based on the Fund’s General Conditions for Agricultural Development
Financing (General Conditions or GC), adopted in April 2009 as subsequently
amended,1 and, for IFAD grants, on the General Provisions Applicable to IFAD
Large Grant Agreements, as well as the Policy for Grant Financing and its
Implementing Procedure, which establish the rules and procedures for designing,
approving and implementing IFAD grants.

The policies and procedures described in this manual also apply to financing
agreements subject to previous versions of the General Conditions, unless they
are obviously inapplicable.2 Any questions as to whether specific procedures
should apply to a particular project or financing agreement should be addressed
to IFAD’s Office of the General Counsel (LEG) for legal aspects, to the Accounting
and Controller’s Division (ACD) for loan administration issues and to the Financial
Management Services Division (FMD) for financial management aspects. Should
any provisions of this manual conflict with the General Conditions, the provisions of
the latter will be applicable.

The Financial Management and Administration Manual (FAM), along with the
exhibits, is intended as a guide for IFAD staff and consultants on various aspects of
financial management and administration. It is intended for use together with IFAD’s
basic legal texts and individual financing agreements.

The Director, FMD, has authority to update the manual and to advise staff and the
extended workforce (and cooperating institutions, where applicable) of significant
changes to IFAD’s policies and procedures for the Fund’s financing.

This manual replaces the FAM in section 431.5 of the IFAD Manual.

1 Amendments of September 2010, February 2013 and most recently April 2014 (which
apply to projects approved by the Executive Board during and subsequent to its 112th session in
September 2014).
2 For example, lending on ‘blend’ terms, provisions for which were introduced in 2014.

xiii
Enquiries/where to go for help
This manual has been made available in digital and hard-copy versions.

The Financial Operations Department (FOD) is responsible for the adequacy and
appropriateness of procedures relating to financial management, disbursement and
loan administration of financing provided or administered by IFAD. Staff members of
FOD work closely with operations departments in IFAD and with borrower/recipient
project staff throughout the project cycle. They may be contacted at any time to
seek information or clarification on these procedures.

For additional help, please contact by e-mail:

FMD (fmdmailbox@ifad.org)
FMD_APR@ifad.org For enquiries relating to the Asia and the Pacific
(APR) region
FMD_ESA@ifad.org For enquiries relating to the East and Southern
Africa (ESA) region
FMD_LAC@ifad.org For enquiries relating to the Latin America and
the Caribbean (LAC) region
FMD_NEN@ifad.org For enquiries relating to the Near East,
North Africa and Europe (NEN) region
FMD_WCA@ifad.org For enquiries relating to the West and Central
Africa (WCA) region
FMD_Grants@ifad.org For enquiries relating to IFAD grants
FOD_EC_Team@ifad.org For enquiries relating to European Commission
matters
ACD_Finance_Support@ifad.org For enquiries relating to Loan and Grant
administration including debt servicing and
disbursements

xv
PRINCIPLES OF FINANCIAL MANAGEMENT AND
ADMINISTRATION MODULE A
Module A
Principles of financial management and administration
• Principles and key considerations
• Anti-corruption policy

2
A.1 Principles and key considerations
1. This module presents the principles underlying (b) Obtaining reasonable assurance that
standard procedures for the management development funds are ‘used for the
and administration of IFAD financing. purpose intended’ by assessing FM capacity
These principles apply equally to all IFAD- and risks during project preparation and
financed projects and to resources provided the implementation of each operation
to IFAD by other donor agencies1 unless and, where relevant, requiring the B/R to
specifically excluded. implement specific actions to mitigate
risks posed by identified weaknesses, both
2. The Agreement Establishing IFAD states:2 “The
in the project design phase and during
Fund shall make arrangements to ensure that the
implementation.
proceeds of any financing are used only for the
purposes for which the financing was provided, 6. IFAD finance officers (FOs), in collaboration
with due attention to considerations of economy, with country programme managers (CPMs),
efficiency and social equity.” This responsibility will monitor FM performance of financed
is generally described as a “fiduciary obligation” projects at regular intervals and provide
with respect to the investment funds approved for implementation support as needed. FMD will
financing provided by IFAD. assess disbursement risk3 initially on the basis of
overall project FM capacity and risks determined
3. The primary responsibility rests with the
in the project design phase. This will be taken
borrower/recipient (B/R) to maintain financial
into consideration by FMD in determining
management (FM) arrangements that assist in
appropriate project disbursement arrangements.4
meeting fiduciary obligations and that provide
reasonable assurance to stakeholders that 7. Financial administration of development projects
funds have been used as intended. IFAD’s role involves making funds available to B/Rs as
is to support the B/R’s capacity to meet this needed, in compliance with the terms with which
responsibility and to provide general oversight on these have been approved.
the design and functioning of FM arrangements
8. During project implementation, these risks will
during project implementation. ‘Financial
be periodically updated by FMD in the light of
management’ refers to the organization,
implementation experience. Staff of ACD will
budgeting, accounting, internal control, funds
process disbursements after considering these FM
flow, financial reporting and internal and auditing
risks, in addition to the specific characteristics
arrangements by which B/Rs receive funds, spend
of withdrawal applications (WAs), and will
them and record their use.
determine the timing, frequency and scope of
4. IFAD is committed to enhancing aid effectiveness ex post checks to be performed on the
by encouraging the appropriate use of country applications.
systems and institutions. In this context, IFAD
9. In the light of disbursement experience, and
procedures and practices will be aligned with
where appropriate, FMD staff will also update
country systems where relevant.
FM risk ratings and modify disbursement
5. IFAD meets its obligations by: arrangements for the remainder of the project
period. Remedies, including suspension of
(a) Using country public financial management
disbursements, may also be considered, in line
(PFM) systems, where feasible, during
with IFAD procedures, after approval by the
implementation of IFAD projects; and
Director, FMD.

1 These include supplementary and complementary funds provided by donors and administered by IFAD (e.g. the Adaptation
for Smallholder Agriculture Programme [ASAP], Global Environment Facility [GEF], Spanish Trust Fund Facility [STF] and European
Union/European Commission [EU/EC] funds).
2 Article 7(1)(c).
3 ‘Disbursement risk’ is the risk that project funds are disbursed to an unauthorized recipient and/or not spent for the purposes
intended.
4 Further guidance on disbursement arrangements is available in module H.

Module A 3
10. The General Conditions foresee ‘Special manual customization capabilities are being
Commitments’ (SCs) as a permissible avoided in the development of new corporate
disbursement method, and therefore reference financial systems). Consequently, the option
to policies and procedures that govern their of having SC letters may not appear in the LtB
treatment are described throughout this manual. template. Only in exceptional situations will
In practice, however, SCs are discouraged, an SC letter need to be added, following FMD
owing to their complexity and the manual clearance and approval by the Chief Controller
customization they require within IFAD’s – for example, if, following examination, other
financial systems (as a matter of principle, disbursement solutions have been found to be
unworkable.

A.2 Anti-corruption policy


11. In 2005, IFAD adopted an anticorruption policy.5 acting as representatives of IFAD. ‘Zero tolerance’
Its goal is to prevent fraud and corruption in means that IFAD will pursue all allegations falling
IFAD-supported projects and in contracts at local, under the scope of its policy and that appropriate
national, regional and international levels. sanctions will be applied where the allegations
are substantiated.
12. The policy establishes zero tolerance for irregular
practices in projects financed through IFAD loans
and grants, whether supervised directly by the
Fund or by a cooperating institution (CI). The
policy also establishes zero tolerance for irregular
practices by staff, consultants or individuals

5 IFAD Policy on Preventing Fraud and Corruption, document EB/2005/86/INF.8.

4
TYPES OF FINANCING MODULE B
Module B
Types of financing
• Agreement Establishing IFAD
• Loans
• Single currency lending
• Additional financing
• Grants and supplementary funds
• Debt Sustainability Framework

6
B.1 Agreement Establishing IFAD
1. Article 7(2)(a) of the Agreement states: such terms as the Fund deems appropriate,
“Financing by the Fund shall take the form having regard to the economic situation and
of loans, grants and a debt sustainability prospects of the Member and to the nature and
mechanism, which shall be provided on requirements of the activity concerned.”

B.2 Loans
2. As defined in the Policies and Criteria for IFAD 3. Prior to the introduction of blend terms, loans
Financing (section IV),1 loans are provided on were also available on intermediate terms, which
ordinary, blend or highly concessional terms2 offered an interest rate per annum equivalent
as follows: to 50 per cent of the variable reference interest
rate, as determined annually by the Executive
(a) Loans on highly concessional terms are not
Board, and a maturity period of twenty (20)
subject to interest, but bear an annual
years, including a grace period of five (5)
service charge of 0.75 per cent on the
years. IFAD currently has loans ongoing on
outstanding principal amount of the loan,
intermediate terms that were approved prior to
and have a maturity period of forty (40)
the introduction of blend terms.
years, including a grace period of ten (10)
years, starting from the date of approval by 4. The eligibility of each B/R for specific
the Executive Board. lending terms is reviewed and determined
annually by the Programme Management
(b) Loans on blend3 terms are subject to interest
Department (PMD) and communicated
on the principal amount outstanding at an
through annual e-mails.
annual fixed rate of 1.25 per cent and an
annual service charge of 0.75 per cent, and 5. The Policies and Criteria for IFAD Financing
have a maturity period of twenty-five (25) further state (section IV(a)(iii)(6)):
years, including a grace period of five (5)
The Executive Board may vary the grace period and
years, starting from the date of approval by
the amount of each instalment for the repayments of
the Executive Board.
loans received on blend terms and ordinary terms.
(c) Loans on ordinary terms are subject to In so doing, the Executive Board, on information
annual interest based on the variable IFAD provided by the President of IFAD, shall take into
reference interest rate, and have a maturity account a country’s debt sustainability and debt-
period of fifteen (15) to eighteen (18) servicing capacity. In submitting a proposal for the
years, including a grace period of three (3) lending terms to apply to a country for a loan to
years. The maturity period for ordinary the Executive Board, the President of IFAD shall
term loans starts from the date IFAD has ensure that: (i) the grace period for the loan, which
determined that all conditions precedent shall be established in relation to the date on which
to withdrawal have been fulfilled in a loan becomes effective and the date upon which
accordance with GC section 4.02(b). disbursement of the loan is to cease, shall not exceed
six years; and (ii) the net present value in SDR of
the blend terms and ordinary terms specified in (2)
and (3) above is maintained.

1 Refer to exhibit B-2 Policies and Criteria for IFAD Financing.


2 Until 2010, IFAD loans were also provided on intermediate terms, and from 2010 to 2013 on hardened terms. Definitions of
these financing terms were provided in the respective applicable General Conditions at the time.
3 ‘Blend’ terms were approved by the Executive Board at its Thirty-Sixth Session on 14 February 2013, in lieu of the
‘intermediate’ terms that had been offered earlier.

Module B
A 7
Staff should note that when borrowers request September 2014, the General Conditions were
an increase in the grace period to six years at amended to permit loans to be approved in
or prior to loan negotiations, specific approval other currencies – the ‘denomination currency’.
must be requested from the Executive Board. In cases that involve the use of borrowed
For this purpose, the related request and any funds, the Fund shall maintain the principle
additional supporting information must be of ensuring that it incurs no foreign currency
specifically stated in the President’s report. exposure. The underlying methodology for
supporting a denomination currency request
6. Historically, loans provided from IFAD’s
from borrowers is detailed in module J
regular resources have been denominated in
section J.4.
special drawing rights (SDR).4 With effect from

B.3 Single currency lending


7. Historically, IFAD has experience in single (b) Pricing
currency lending, while also having benefited
For reference, SDR-denominated loans
from more recent experience as a result of
are priced at the SDR LIBOR six-month
activities financed through Kreditanstalt für
composite rate plus the applicable spread.
Wiederaufbau (KfW – the German Government-
owned development bank) and the STF. In mid- (i) EUR-denominated loans: the
2016, an initial tranche for single currency loans underlying interest rate will be
was made available in euros (EUR) and United EURIBOR plus the applicable spread.
States dollars (US$) for lending products only,5 (ii) US$-denominated loans: the
thereby excluding the financing of all types of applicable rate is the US$ component
grants. Countries receiving financing under the of the SDR LIBOR six-month
Debt Sustainability Framework (DSF) that have composite rate plus the applicable
been identified as ‘yellow light’ countries – that spread.
is, receiving financing on a 50:50 DSF grant
and highly concessional loan basis – are also 9. In situations in which there is a loan component
excluded from single currency lending for both grant (IFAD or ASAP) to be approved at the
portions of the financing. same session of the Executive Board, the
denomination currency of all financing streams
8. Single currency lending reduces the complexity should be harmonized in SDR. See also exhibit
for borrowers preferring to borrow in a single B-3 Guidance Note – Single Currency Lending.
currency and to subsequently manage the risk of
currency volatility through a debt management
office. Loans denominated in a single currency
are similar to SDR-denominated loans except
for two areas:
(a) Consistency of the currency is required
throughout the loan. To the extent possible
and at minimal cost, the currency of the
designated account (DA) and the loan
service payment currency should be the
same as the denomination currency of
the loan.

4 SDR comprise a basket of currencies as established and valued from time to time by the International Monetary Fund (IMF).
The composition of the basket, and the relative weights of the constituent currencies, are available at www.imf.org.
5 US$ and EUR single currency loans have been made available, subject to funds availability, for submission to the Executive
Boards from September 2016 onwards.

8
B.4 Additional financing
10. ‘Additional financing’ (also informally referred 12. Amendment of the existing financing agreement
to as a ‘top-up’) is an instrument that provides (FA) is the preferred option for FAs governed by
further resources to supplement an existing previous versions of the General Conditions,
IFAD-financed investment project. Additional as all new FAs are subject to the new General
financing may be considered under the Conditions and administering financing
following conditions: governed by two different sets of General
Conditions would be difficult.
(a) To meet financing gaps of ongoing projects
caused by: 13. Additional financing may have the same closing
date and expenditure categories as the original
(i) Withdrawal of funding or proposal for
financing, and funds may thus be withdrawn
funding by a cofinancier;
concurrently from both. Before finalization
(ii) Reduction in financing by project of the new FA or amendment of the original
beneficiaries, member governments one, the FO and CPM should consider how
or domestic financial institutions the resources of the original and additional
due to unforeseen and unavoidable financing will be drawn down, that is, whether:
circumstances; and/or
(a) On an equal financing basis;
(iii) Increase in project costs above normal
(b) Progressively (based on the ‘age’ of the
contingencies.
financing); or
(b) To execute the second or subsequent phase
(c) Following another principle (e.g. the
of projects if these projects were designed
movement of selected categories or
for multiphase financing by cofinancing
first drawing down the resources of
partners or by IFAD;
the additional financing if it has fewer
(c) To scale up project activities through a expenditure categories than the original
modular, thematic and/or geographical financing).
expansion of activities/components found
14. The manner in which expenditures will be
to be achieving development results during
attributed to the original and additional
implementation; or
financing should be clarified in schedule 2 of
(d) To bridge financing between two projects the additional financing. The standardized
under a longer-term programmatic category descriptions for the loan/grant
approach. allocation tables in schedule 2 of the FA7
11. Applicable guidelines for additional financing must normally be applied for the additional
can be found via the following link: Revised financing. If it is considered necessary to
guidelines for additional financing for retain the original category descriptions for
ongoing projects.6 The guidelines specify the additional financing, FOs must verify
eligibility criteria, including criteria applicable the compatibility with FlexCube (FXC) by
to additional financing proposals, criteria consulting ACD systems staff. See module
for submitting a proposal, the review E section E.13 for a description of exchange
process, approval procedures and required rates to be applied to the SDR/denomination
documentation. currency amount(s) of the total financing stated
in the FA.

6 See exhibit B-1 President’s Bulleting PB 2014/01/REV.1.


7 Please refer to exhibit C-4 Information Circular IC/FOD/02/2013; see also module E.

Module B
A 9
15. The FO and CPM should also agree on an modality is applicable to both. The recovery
appropriate DA modality, if foreseen, including, trigger for additional financing is based on the
when necessary, other ways of increasing cumulative balances of the unrecovered AA and
the project’s overall authorized allocation available financing. The letter to the borrower/
(AA). The AA amounts of both the original recipient (LtB/R) of the original financing
and additional financing must be taken into must be amended to include provisions for the
account to ensure that the DA replenishment additional financing.

B.5 Grants and supplementary funds


16. IFAD provides global, regional and country- 17. Grants may be denominated in SDR or in other
specific grants from its own resources, and currencies (the denomination currency – see
grants financed by supplementary funds. Eligible module C, section C.5).
recipients of IFAD grants can include developing
18. Grants financed by supplementary funds are
Member States, intergovernmental organizations
usually denominated in the same currency as
(including United Nations agencies and CGIAR
that paid by the donor (module L provides
centres), civil society organizations, academic
further guidance).
institutions and the private sector. Large grants
extended to Member States are provided
through an FA. Large grants to other recipients
and small grants have their own grant agreement
models, which are not subject to the General
Conditions and are separately addressed in
modules K and L of this manual.

B.6 Debt Sustainability Framework


19. IFAD has adopted a model based on that of 20. Under the DSF, countries eligible for highly
the World Bank. Countries with low debt concessional lending receive financial assistance
sustainability (‘red light’ countries) are eligible on as grant rather than a loan basis. IFAD is
for assistance on 100 per cent DSF grant terms; expected to be compensated on a pay-as-you-go
countries with medium debt sustainability basis (according to the underlying amortization
(‘yellow light’ countries) are eligible for assistance schedule for principal amounts, while the interest
on 50/50 DSF grant/loan terms; countries with is forgone). Principal repayments should occur as
high debt sustainability (‘green light’ countries) replenishment contributions by Member States.8
are eligible for 100 per cent loans, on either
highly concessional, blend or ordinary terms.
Financing plans for yellow light countries must be
thoroughly assessed by IFAD and discussed with
the B/R to work out the most suitable allocation
of loan and grant funds throughout the project
implementation period. The most usual case and
the easiest to administer is 50:50.

8 Eligibility for DSF financing is determined by a country-by-country debt sustainability analysis conducted by the World Bank
and the IMF.

10
B.7 Operational Guidelines for the
determination of financing terms
applicable to IFAD’s Borrowers;
Principles and Procedures
21. Delegation of Authority. FMD is accountable for 24. The Policies also establish that IFAD should
monitoring and implementing the operational provide financing under the debt sustainability
procedures, in strong collaboration with OPE, mechanism (DSF) to eligible Member States, in
and other divisions as required. the form of grants or a combination of a grant
and a loan on highly concessional terms.
22. Underlying parameters for determination of
financing terms. An underlying principle for 25. Triggers for Transition. The parameters
these operational guidelines is to follow the comprise the following:
principles set out in the Polices and Criteria
a. The guiding principles and criteria shall be
for IFAD Financing (the Policies) without
normally applied in a consistent manner
introducing significant changes from past
for all Borrowers to ensure fair and equal
practice. Further changes to the operational
treatment of all Borrowers, in line with
guidelines may be implemented for reasons of
IFAD’s policies and procedures.
clarity, enhanced transparency and subject to any
related policy changes, as relevant. b. Annually, the GDP deflator factor is
applied to the 1992 GNP thresholds, using
23. The Policies set out the definition for countries
the OECD Economic Outlook database,
eligible for highly concessional blend and
available on http://www.oecd.org/, to
ordinary terms as follows, (Parag 15 (a) (ii)):
calculate the equivalent current thresholds.
(i) Members having a gross national product
c. Once the thresholds have been calculated,
(GNP) per capita of US$ 805 or less in
further conditions have to be considered in
1992 prices or classified as International
preparing the financing terms, as follows:
Development Association (IDA)-only
countries (The World Bank Operational – All IDA-only countries, HC terms are
Manual-OP 3.10-Annex D), shall normally applied automatically;
be eligible to receive loans from IFAD on – For Blend countries, the cut-off points
highly concessional (HC) terms. The total are used based on GNI per capita to
amount of the loans provided each year determine if the country is subject to
on highly concessional terms shall amount HC or Blend lending terms;
to approximately two thirds of the total
amount lent annually by IFAD; – Countries eligible for IBRD financing
will be provided Ordinary lending terms
(ii) Members which are eligible for IDA blend from IFAD
terms will be eligible for IFAD blend
terms, provided that they are above the – Once the lending terms have been
IFAD threshold for eligibility for highly identified, the DSF grant eligibility
concessional terms; percentage is applied.9

(iii) Members having a GNP per capita of


US$ 1,306 or above in 1992 prices shall
normally be eligible to receive loans on
ordinary terms.

9 As per the Operational Policies of the World Bank Operational Manual – OP3.10 Annex D

Module B 11
26. Communication process for borrowers in 30. Debt servicing capacity issues. For countries
transition. FMD will present an information with specific debt-servicing capacity issues, an
memo to EMC annually, with an analysis of the assessment may be made by the President of
underlying reasons for change. In so doing, it IFAD of the Member State’s debt sustainability
will consult with OPE, PDMT and LEG. and its debt-servicing capacity in order to
determine the financing terms to be applied.
27. Definition of the length of transition period
This should be done on an ad hoc basis based
including Reversal. IFAD will continue to apply
also on country demand and in conjunction
changes on an annual basis by calendar year
with PMD regional teams. Any such assessment
(hence will be applied normally six months after
would be brought for endorsement to the
those of the World Bank).
EMC. In all cases, the Executive Board holds the
28. Communications with MDBs. Coordination delegated authority to approve financing terms
with other MDBs will be strengthened further for individual projects.10
to enhance knowledge of trends and expected
transition countries.
29. Communications with the Borrower when
applicable lending terms change. Following the
EMC communication for changes in financing
terms, a communication will be made to the
Borrower to explain timeframes and impact
normally through the Regional Director,
although PMD and FMD may agree differing
arrangements depending on the country context
(e.g. directly through the CPM). The CPM,
with strong support from the Finance Officer,
will provide necessary follow-up with direct
counterparts at Government level. Additional
information regarding the effective financing
terms will be published on IFAD web site as
appropriate.

10 LEG, PMD and FMD would consult to review such exceptional cases on a case by case basis.

12
IFAD PROJECT CYCLE OVERVIEW
MODULE C
Module C
IFAD project cycle overview
• Introduction
• COSOP
• Project design
• OSC approvals
• Negotiation of the financing agreement
• Executive Board approval and signing of the financing agreement
• Project start-up, implementation and supervision
• Midterm review
• Project completion
• Evaluation

14
C.1 Introduction
1. IFAD activities in a particular country are (in-country) component, usually including
undertaken by a Country Programme the CPM (if outposted), representatives of
Management Team (CPMT), the composition government ministries, directors of ongoing
of which is approved by the regional divisional IFAD projects, and representatives of CIs,
director. The CPMT is a resource group of donors based in the country and civil society
stakeholders associated with the entire country involved in the IFAD country programme
programme cycle (from formulation of the (NGOs, community-based organizations,
country strategic opportunities programme farmers’ organizations, other member-
[COSOP] to project design, implementation, based organizations, indigenous peoples’
supervision and completion). It consists of representatives, etc.).
an internal component, comprised of the
2. The IFAD project cycle normally takes place in
CPM, regional portfolio adviser, legal counsel
phases. These are described in the following
and FO, and other relevant IFAD staff (e.g.
paragraphs, together with the relevant FM
from the Policy and Technical Advisory or
procedures to be implemented by FMD FOs.
Communications Divisions) and an external

IFAD Project Cycle


(the following are the ten steps to form the project cycle image)

10.
Project
Completion

9.
and Closing
1.
Results from
Mid-term the COSOP
Review
8.
Supervision
and
2.
Implementation Project
Support Design

7. 3.
Implementation Negotiation
of Financing
Agreement

6. 4.
Project start-up Board
and PIU
5. Approval
Signing of
Financing
Agreement
and LTB

Module C
A 15
C.2 COSOP
3. The COSOP is the main instrument in defining 6. The results of this country-level FMA are
strategy and identifying opportunities for IFAD’s summarized for the COSOP in the Fiduciary
interventions at the country level, usually over Summary of the Country Portfolio, which is
a five-year period. As the starting point of the prepared by the FO before the meeting of the
project cycle, the COSOP normally contains Operational Strategy and Policy Guidance
outlines for future project ideas, as well as initial Committee (OSC) at which the COSOP will
selection of the project supervision modality be reviewed. The FO is required to submit a
and approach. brief of country financial data, included in
the PFM highlights. This PFM information
4. In the COSOP formulation phase, overall FM
is obtained from internal diagnostic reports
risk is assessed at the country level. Assessment
and country fiduciary summaries. The brief is
of country financial and audit systems is the
then incorporated into the COSOP document.
responsibility of FMD.1 This assessment is a desk
Exhibit C-1 Fiduciary Summary of the Country
review of the relevant documentation available
Portfolio.
on: governance; Transparency International’s
most-recent Corruption Perceptions Index 7. If the outcome of the assessment is negative
(CPI) scores; findings of any recent donor- (i.e. all components of national public FM
funded financial-management diagnostic systems are found unsuitable for project use),
reviews; and any recent reports from donors and then the COSOP will state that national systems
development partners (e.g. Public Expenditure cannot be adopted for the time being. If, on the
and Financial Accountability [PEFA] assessments contrary, the initial assessment is positive (i.e.
or similar). This information is supplemented some components of national systems are found
by data on each ongoing IFAD country portfolio suitable or partially suitable for project use),
and the FM risk ratings assigned to it. A country then the results will be stated in the COSOP
financial management assessment (FMA) text is and used as the foundation for a project-specific
drafted for input into the COSOP. assessment to be conducted during the
design phase.
5. When a Member State and IFAD are unable
to define detailed objectives or develop a
programme for the medium term, a country
strategy note (CSN) is prepared instead of an
RB-COSOP. In addition, subject to approval
by the Associate Vice-President (AVP), PMD,
CSNs can also be prepared for countries with
an allocation equal to or below US$5 million
under the performance-based allocation system
(PBAS). CSNs are expected to be transitional
documents, and most country teams are
expected to transition to full RB-COSOPs.

1 Assessment of country procurement systems is the responsibility of PMD and is described in detail in the Project Procurement
Guidelines and the IFAD Procurement Handbook.

16
C.3 Project design
8. The design phase, led by the CPM, starts 11. Project-specific assessments of the FM capacity
with elaboration of the project concept note of the implementing entity are carried out in
(sometimes part of the COSOP process), which this phase by FMD. A financial management
is more fully developed during design. specialist (FMS) in the field may complete the
The next step is preparation of the project design detailed assessments and documentation.
report (PDR), which incorporates the high-level The FO will review and clear the outputs to
country analyses contained in the COSOP, a ensure compliance with the guidelines.
detailed project description and project-specific The evaluation covers:
analyses, implementation and institutional
(a) Adequacy of planning/budgeting tools;
arrangements, project benefits, costs and
financing, project risks and sustainability, (b) Funds flow;
innovative features, and learning and knowledge (c) Internal control systems;
management strategies.
(d) Accounting systems;
9. As a member of the CPMT, the FO advises
the CPM in the design process, paying (e) Treasury management systems;
special attention to the project financing (f) Financial reporting and auditing; and
plan, categories of expenditure, financing
(g) FMA (module D).
percentages, operational modalities of project
and advance accounts, funds flow analysis, The evaluation thus ensures the practical
audit requirements, thresholds for the use application of existing regulations; existence
of statements of expenditure (SOEs), and of appropriate control mechanisms; presence
conditions precedent to withdrawal. The FO of sufficient, competent human resources;
briefs members of the design mission on adequacy of the organizational and functional
IFAD’s FM requirements and debriefs returning setup (including record-keeping); adequacy of
missions. Detailed procedures for assessment audit capacity (see module I, section I.1); and
of FM capacity and risk relating to design are overall management capacity of the B/R.
provided in module D.
10. Country officials are also involved closely in the
project design phase, during which the bulk of
negotiations with the government takes place.
Discussions, studies and analyses are carried
out at this stage, with a view particularly to
final decisions on essential aspects of project
implementation:
(a) Use of national procurement and FM
systems;
(b) Requirements for the FM and monitoring
and evaluation (M&E) systems to be
implemented in the project;
(c) Assessment of national audit capacity; and
(d) Supervision modality.

Module C
A 17
C.4 OSC approvals
12. The FO prepares a Fiduciary Summary of the and ensure that IFAD corporate decisions to
Country Portfolio for each OSC meeting at be submitted to the Executive Board include
which COSOPs or project concept notes are information on compliance with corporate
reviewed. The summary must be provided to financial policies and procedures – and also to
QAG two weeks before the OSC meeting. provide feedback with respect to any emerging
This in turn requires the summary to be sent risks/challenges (see exhibit C-2, FMD Quality
at least thirteen working days prior to the OSC Assurance Procedures). The final summary must
meeting to the cluster’s respective team leader, be shared with the OSC one week before the
FMD, for his/her review and comments on the meeting. FMD comments are incorporated in
Fiduciary Summary. These are forwarded to the the reports, and the documentation presented
Director, FMD, who normally attends the OSC subsequently to the Executive Board requires
meeting to provide guidance to the committee FO clearance.

C.5 Negotiation of the financing


agreement
13. Once it has been completed, the PDR is produce meaningful analytical reports on
submitted for a final project quality check disbursements against categories of expenditure.
through the quality assurance (QA) process.
15. The draft FA is prepared by legal counsel and
Following a QA decision to submit the project
cleared by the CPM and FO. The CPM verifies
to the Executive Board for approval, the CPM
that the draft agreement is consistent with the
prepares a ‘President’s report’ that summarizes
PDR and that all necessary project conditions
the main implementation, institutional and
are incorporated as appropriate. The FO assists
financial aspects of the proposed financing. The
in the preparation of financial clauses: financing
FO prepares the financial aspects pertaining to
amount, lending terms and preconditions to
section IV(B) President’s report (fiduciary template)
disbursement, and the schedule 2 allocation
shows the format of a President’s report. After
table and withdrawal schedule, including
clearance in Scriptoria by the FO,2 LEG and the
arrangements for disbursement and retroactive
PMD regional director and approval by the AVP,
financing. Module E provides separate guidance
PMD, the report is submitted to the Executive
on schedule 2 allocations for those projects
Board. The PDR is made available to Executive
financed jointly from loan and DSF grants, as
Board members as well.
well as other financiers’ funds.
14. Expenditure categories presented in the FA
16. The FO explains the lending terms during
(schedule 2) have been standardized since
negotiations and requests the borrower to
2013.3 All future project cost categories must
confirm the dates when repayments will be
conform to these. FMD staff should include brief
due (twice yearly). S/he presents a tentative
explanatory notes in schedule 2 to clarify the
amortization schedule to the borrower, based
nature of eligible expenditure and strengthen
on assumptions as to when the loan will
expenditure eligibility checks by FMD at the
become disbursable, and the repayment dates.
time of disbursements. Requests for new
Once the loan has been approved, this must
category descriptions may be accommodated
be communicated to ACD. Where the loan
if these can be linked to the nearest underlying
is negotiated on ordinary terms, FMD must
category. The standard categories are linked
communicate to ACD as soon as disbursement
to global categories, which enables IFAD to
conditions are met.

2 E-mail clearance from the respective team leader must have been received prior to FO final approval.
3 See exhibit C-4 Information Circular IC/FOD/02/2013.

18
17. Where project financing approval is required in 19. During negotiations, key FM issues to be dealt
various denomination currencies, the following with in the LtB/R should also be explained to
procedure is applied: the B/R delegation to ensure clarity regarding
the aspects described.5 These include the
(a) Where project financing is from IFAD’s4
following project financial aspects: modality of
regular resources, and the main financing
provision of the DA, counterpart funds, flow of
is in SDR, exceptions may be authorized
funds, SOE thresholds and audit arrangements.
for the component grant in another
Where these were not fully determined during
denomination currency; this is subject to
the design phase, they may be further discussed
clearance by the Treasury Division (TRE) to
with the B/R delegation. Further detailed
confirm that IFAD’s currency exposure can
guidance with respect to selection of DA
be hedged.
modalities is provided in module H.
(b) Where the main financing (again from
20. At the conclusion of negotiations, the CPM
IFAD’s regular resources) is denominated in
and the authorized representative of the B/R
a denomination currency other than SDR,
initial the agreed FA and sign the minutes
the related component grant financing
of the negotiations, which have been cleared
is normally in the same denomination
by LEG and FMD.
currency as the main financing;
(c) For supplementary donor financing, please
refer to module L;
(d) For borrowed resources, financing will
typically be in the same currency as that
borrowed, unless agreed otherwise by the
AVP, FOD.
18. A draft FA is sent to the B/R as far in advance
of negotiations as possible, and the B/R is
invited to provide written comments. Almost
all design issues, including those relating to
FM and disbursement, should normally have
been extensively discussed with the B/R prior to
negotiations. Negotiations are usually held at
IFAD headquarters in Rome, but they may also
take place in the Member State or elsewhere,
via videoconference, or through exchanges of
correspondence. The CPM leads the negotiating
team and is assisted by legal counsel and the
FO. Legal counsel provides explanations of the
General Conditions and other legal matters.
The FO handles discussion of the articles and
schedules related to FM, and is responsible for
briefing the B/R on IFAD’s core disbursement
principles, withdrawal procedures, the LtB/R,
and loan repayment policies and procedures.
Final decision on the language used in the FA
rests with legal counsel.

4 Agreement Establishing IFAD, article 4, Resources.


5 FM aspects outlined in the LtB/R are discussed for information purposes and to ensure clarity on the side of the B/R; no
negotiations with regard to these specific FM elements takes place.

Module C
A 19
C.6 Executive Board approval and
signing of the financing agreement
21. Projects are generally submitted to the Executive 23. In exceptional circumstances, Executive Board
Board for approval only after both IFAD and the approval may be provided on a conditional
B/R have initialled the negotiated text of the FA. basis. This could be for varying reasons:
The negotiated text is disclosed to the Executive technical issues in the project design that need
Board as an appendix to the President’s report. further clarification or due diligence, or because
negotiations have not yet been completed.
22. Certain projects may be submitted to the
When the specific exceptional circumstances
Executive Board under the ‘lapse-of-time’
are known beforehand, legal counsel must
(LOT) procedure.6 It is also possible to submit
be consulted and the President’s report must
projects to the Executive Board for a vote by
specifically disclose these circumstances and
correspondence:
request conditional approval accordingly.
(a) Negotiated FAs will be delivered to In all such cases, the date when all conditions
representatives at least five business days set by the Executive Board are fulfilled is
prior to the lapse of 30 days following recorded in FXC, and final maturity dates are
delivery of proposals (i.e. President’s determined accordingly.
reports and project design documents).
(b) If the negotiated FA is not posted on the
Fund’s website by the deadline, and/or
there are substantial changes with respect
to the terms and conditions presented to
members in the President’s report, the
proposal concerned is withdrawn from
the LOT approval process. It may be
resubmitted for approval later, either under
the LOT procedure or at a regular session of
the Executive Board.

C.7 Project start-up, implementation


and supervision
24. After Executive Board approval, the FA is signed (if applicable) have been fulfilled. These include:
by the President of IFAD and an authorized establishment of the project implementation
representative of the B/R. Once the FA has unit (PIU);7 accounting systems, FM procedures,
been signed by the authorized representatives and internal control systems in place; and DA
of both parties (and ratified if required), and project account(s) (if any) opened. Some
it enters into force. Once entered into force projects require retroactive financing and/or
according to section 4.02(b) of the GC, no start-up costs to ensure functionality.
withdrawal ,except for start-up costs, shall be The project is implemented by the PIU, with
made from the loan and/or grant accounts until periodic supervision and implementation
the first annual workplan and budget (AWP/B) missions undertaken by IFAD to report on its
has been approved by the Fund and IFAD has progress. These stages are treated in depth
determined that all other conditions precedent in module G.
to withdrawal

6 For applicable rules and procedures, see http://intranet/divisions/ead/es/doc/lapse.pdf.


7 This is often also referred to as the project coordination unit (PCU) or project management unit (PMU).

20
C.8 Midterm review
25. In accordance with GC section 8.03(b), expected impact on beneficiaries, dating from
“if specified in an Agreement, the Lead project start-up; identify constraints and issues
Programme Agency and the Fund shall jointly related to all aspects of project implementation
carry out a review of Project Implementation (technical, institutional, organizational,
no later than the midpoint of the Project financial and administrative); and recommend
Implementation Period (the ‘Mid-term remedial action or reorientation of the project
Review’).” The objective of the midterm review as necessary. MTR recommendations may result
(MTR) is to: evaluate the level of achievement in amendments to the FA or cancellation of all
of development objectives and the project’s or part of the financing.

C.9 Project completion


26. The ‘project completion date’ marks the end of 27. The project completion report (PCR) also
project activities. GC section 8.04 provides: includes an analysis of project costs and financing:
“As promptly as possible after the Project adequacy of the financial projections in the
Completion Date but in any event no later than original design; financial execution against
the Financing Closing Date,8 the Borrower/ loan allocation; timeliness and adequacy of
Recipient shall furnish to the Fund a report on contributions from the various financiers; and FM
the overall implementation of the Project, in issues (e.g. flow of funds, accounting, financial
such form and substance as may be specified in reporting and audit). The respective government
the Financing Agreement or as the Fund shall leads preparation of the PCR, and PMD oversees
reasonably request. At a minimum, such report the quality and timeliness of the completion
shall address: (i) the costs and benefits of the process and the report and provides support where
Project; (ii) the achievement of its objectives; necessary. The PCR is shared with FMD for review
(iii) the performance by the Borrower/Recipient, and feedback on financial and FM performance.
the Project Parties, the Fund of their respective
28. Guidance on project completion in relation to
obligations under the Agreement; and (iv)
financial closing and extensions to the completion
lessons learned from the foregoing.”
date can be found in modules E and F, respectively.

C.10 Evaluation
29. The final phase of the project cycle is evaluation. (a) The project portfolio;
The Independent Office of Evaluation of
(b) Non-financing activities: policy dialogue,
IFAD (IOE) assesses the impact of IFAD-
partnership-building and knowledge
financed projects through country programme
management; and
evaluations (CPEs), which provide the building
blocks for preparation of a new COSOP for the (c) COSOP performance, in terms of relevance
country. CPEs essentially entail an assessment of and effectiveness.
three interrelated components:

8 Only in cases of ‘force majeure’ that impede timely delivery of PCRs can a waiver be requested from the AVP, PMD, by regional
directors (memo AVP, PMD, Operational Procedures on Completion Reporting, 11 November 2015).

Module C
A 21
FINANCIAL MANAGEMENT AT PROJECT DESIGN
AND APPROVAL MODULE D
Module D
Financial management at project design and approval
• Objectives and principles of financial management assessment
• Responsibilities and roles of FMD staff
• Risk assessment methodology
• Designing project FM arrangements
• Database of risk ratings
• Risk-based disbursement – design of disbursement arrangements
• Approval processes

24
D.1 Objectives and principles of financial
management assessment
1. IFAD’s FM strategy requires assessment of the 2. Where the capacity is assessed to be less than
lead project agency’s (LPA) capacity to maintain adequate, assessment identifies the resultant
acceptable FM arrangements. This is considered FM risks and proposes measures to mitigate
acceptable if the arrangements for staffing, them. FMA is thus an integral part of the overall
budgeting, flow of funds, accounting, financial project fiduciary risk (PFR) assessment process.
reporting, internal control, and internal and The findings and conclusions of FMA are a
external auditing systems can ensure that the primary source of input into finalization of
executing and/or implementing agency has, or project design with respect to flow of funds and
will have, sufficiently strong FM systems in place accountability arrangements.
during project implementation. Such systems, in
3. The fiduciary risk of each project will be
turn, must have the capacity to properly manage,
assessed initially during project design and then
control and report project finances so as to
reviewed at least annually throughout the life of
ensure that project funds are used economically
the project. The ‘project fiduciary risk rating’ will
and efficiently for the purposes intended. An
be categorized as low, medium or high
FMA must be carried out in sufficient scope
(see section D.3).
and detail to provide IFAD with all needed
information on the LPA and other project
parties. FMA should include information on the
FM capacity of each project party involved in
handling financing proceeds1 and proposed FM
arrangements during project implementation.

D.2 Responsibilities and roles


of FMD staff2
4. Financial management staff begin their project implementation arrangements, past experience
engagement at an early stage of design and with the proposed implementing entity, the
remain engaged thereafter, from negotiations nature of components, and expenditures and
with the B/R through approval of the financing, the financing plan.
project implementation and closure. As
5. After OSC approval of the concept note, work
described previously, project design starts after
on design is initiated by the CPM. During
a project has been identified and a concept
project preparation, FMD staff assess the
note is approved internally at the OSC. For
FM capacity of the implementing entity and
this meeting, FMD prepares a country fiduciary
FM arrangements of the proposed project to
summary (see exhibit C-1 Fiduciary Summary of
identify risks relating to the accountability
the Country Portfolio), which includes comments
of funds. FM arrangements of the entity(ies)
on the country’s fiduciary environment, recent
responsible for the IFAD-financed operations
portfolio fiduciary experience and preliminary
include those for organization/staffing,
comments on the concept note. In drafting
budgeting, accounting, internal control, flow
these comments, FMD staff should consider
of funds, financial reporting, and internal and
fiduciary implications of the proposed design,
external auditing. FMD staff advise the CPM on

1 These normally include the LPA, project implementing agencies at central and subnational government levels and participating
financial institutions, as applicable.
2 The term ‘FMD staff’ comprises FOs as well as FMSs contracted by IFAD as short-term consultants under TORs approved by
the FO. When substantive work is done by FMSs, the output should be submitted to FOs, who will be responsible for its quality.

Module D
A 25
appropriate risk-mitigating actions to ensure clears the FM aspects of the negotiation package,
accountability of funds, and discuss appropriate comprising the PDR, LtB and draft FA.
FM and disbursement arrangements with the
7. FM staff work in collaboration with the relevant
B/R. When appropriate, specific covenants for
CPMs. When design work is carried out by
these actions are developed and inserted in the
an FMS, the FO is responsible for the quality
FA. Results of the risk assessment and proposed
of work. S/he reviews its technical quality
FM arrangements are documented in annex 7 of
to ensure that inputs to the PDR adhere to
the PDR (see exhibit D-2 Summary of Financial
FMD guidelines and procedures, and that
Arrangements (annex 7).
an appropriate summary is presented in the
6. All proposed projects are subject to quality President’s report. FMA should take place during
enhancement (QE) review, managed by the the project design mission. Initial findings
Policy and Technical Advisory Division, and should be discussed with the CPM at the earliest
to the QA process, coordinated by the Office opportunity, so that s/he may inform the project
of the Vice-President. These processes aim to design team. The draft FMA report should be
improve the design of a project, taking into submitted to the FO and CPM at the end of
account the experiences of similar projects and that mission for inclusion in project design
lessons learned during implementation. The FO documentation.

D.3 Risk assessment methodology


8. Risk assessment considers project design The main international PFM diagnostics
elements, as well as institutional capacity for currently in use include:
FM. The approach to be taken depends on
(a) Public Expenditure and Financial
whether the entity that will manage funds
Accountability (PEFA) assessments;
already exists or is still to be established, as
described below. (b) Country Financial Accountability
Assessments (CFAAs), prepared by the
9. Assessing inherent risk. Country FM risk
World Bank;
may have been assessed during the COSOP
cycle. So, where a COSOP has been prepared, (c) Reports on the Observance of
it will provide relevant information on the Standards and Codes (ROSCs) (fiscal
environment into which IFAD funds will flow. transparency);
However, if a COSOP has not been prepared, (d) Supreme Audit Institutions
an alternative basis for assessment of inherent Performance Measurement
risk must be used, involving one or more of the Framework.4
following sources:
(e) Where one or more of these reports
(a) If available, recent IFAD experience within is not available, researching other
the country/sector may provide a clear relevant national documents is
indication of risk levels, in particular with recommended, such as: legislative
respect to PFM, institutional capacity and documents, national audit authority
governance; reports, reports stemming from anti-
(b) Results from recent assessments3 by other corruption policy and the Economist
donor partners, where available. Intelligence Unit.

3 Typically, within the last three years.


4 www.idi.no or www.intosai.org.

26
10. Currently, the diagnostic report most easily weak capacity, legal structures or governance
available is the PFM Performance Assessment arrangements. Staff should consider this risk
using the PEFA framework.5 The findings of based on documented information about
the PEFA assessment become particularly project implementation arrangements.
relevant when considering assessment of 14. In this context, implementation of an IFAD-
country FM systems that could be used for funded project will often be managed through a
project implementation (e.g. treasury single PIU. Various PIU organizational models can be
account and supreme audit institutions [SAIs]). adopted, depending on circumstances. Typically
Reference may also be made to diagnostic these are:
studies done by other bilateral or multilateral
donors where these are available. Note that (a) A permanent PIU is already
PEFA assessments generally focus on the central established – within the government
government (e.g. ministries of finance) and do or ministry and staffed by government
not normally include subnational governments employees – that manages implementation
or specific line ministries such as agriculture. of all current projects. The unit could be
Where a project FMA has recently been established as either an integral component
completed for a project financed by another within its existing organizational structure,
donor, its findings on institutional capacity can using corporate systems, or as a stand-alone
be used and references appropriately quoted. unit, using its own systems. Where feasible,
this organizational structure should be
11. The perceived level of inherent corruption the preferred option, as it supports IFAD’s
within the country gives a general guide as to commitment to country ownership.7
the level of inherent risk within the context
of the country’s governance environment. (b) The government or the ministry creates
Transparency International’s annual CPI is a a PIU specifically for the project, which
useful indicator. IFAD’s rural-sector performance will use its own discrete FM systems, but
(RSP) scores6 also provide a focused assessment will be staffed and led by government
of potential risk in the rural sector in staff, supported as necessary by external
which IFAD operates. An indicator of rural specialists. This option provides a basis for
accountability, transparency and corruption, capacity-building and is the best solution
the RSP score is posted annually on the FM where there are significant weaknesses in
dashboard by FMD staff. PFM capacity that cannot be remedied.

12. This initial country-level inherent risk (c) The government or the ministry, together
assessment should be completed as a desk with support from IFAD, creates a
review before the start of project-level dedicated PIU specifically for the project,
FMA, as the results will shape views on the outside the government or ministry
organizational structure to be adopted, organizational structure (referred to as
implementation arrangements and specific ‘ring-fenced’). The PIU would create its
demands that will be placed on the FM system. own discrete FM systems and would be
The results of this review should be documented staffed by external specialists and mainly
in the Fiduciary Summary of the Country non-governmental staff.8 This type of
Portfolio prepared for the OSC meeting. model is the least desirable option, as it
provides little, if any, basis for building
13. Inherent risks may also arise from project design in-house capacity, but may be preferred in
features – such as complexity of implementation a risky country context (weak government
arrangements – and distinctive features of institutions) to ensure project effectiveness.
proposed implementing agencies – such as

5 Assessment reports are normally available at www.pefa.org.


6 RSP assessment scores are compiled and published annually by PMD and are fed into IFAD’s PBAS. The overall score is a
combination of scores for 12 indicators. One of them, the E(ii), scores ‘accountability, transparency and corruption in rural areas’,
and thus is referenced in the Risk-Based Disbursement Guidelines.
7 IFAD is a signatory to the Paris Declaration (2005).
8 In a variation of the ring-fenced model, a donor partner has already established a PIU for an earlier project, on the basis
described in paragraph 14(c), and this unit then takes on implementation of the new project as well.

Module D
A 27
(d) Experienced government or ministerial entities ministry of agriculture is the LPA, but a separate
with strong capacities may be charged with dedicated PIU within the ministry will handle
additional responsibility for a new loan. The both technical and financial issues, FMD staff
entity would act as the main focal point in the should focus on the financial arrangements and
LPA, without the need for a PIU. the controls in place or to be established in the
PIU. Alternatively, if the separate PIU within the
15. In general terms, the higher the inherent risk,
ministry may be responsible only for technical
the more overtly FMD should seek to ensure
issues, and the ministry would cover all FM and
that appropriate FM arrangements are, or will
disbursement from their existing structures, then
be, in place at the project level. The decision
the focus should be on the FM capacity and
must finally be taken in consultation with the
control environment within the ministry. The
CPM. As a general rule:
decision on the most appropriate institutional
(a) An assessment rated ‘high risk’ would arrangement for each project is made by the
generate the conclusion that the country CPM, after taking into consideration technical
PFM systems should not be used ‘at this aspects, local government regulations and
time’ without significant mitigation action. advice provided by FMD staff with respect to FM
(b) An assessment rated ‘medium risk’ indicates capacity and risks.
that the preferred option is possible (i.e. 18. Project-level assessment of control risks.9
to use an organizational structure that Comprehensive project-level risk assessment
meets IFAD’s commitment to implement should be conducted for every project
the Paris Declaration rather than design a during the design phase to establish whether
ring-fenced solution). However, proposed appropriate10 FM arrangements within the
in-house arrangements must be carefully implementing entity – budgeting, accounting,
appraised during project-level FMA financial reporting, funds flow, external audit
to identify, where necessary, feasible and internal control systems – will be, or can be,
mitigation actions that will ensure that in place when project implementation begins.
IFAD’s fiduciary obligations are satisfied. Assessment should take into account project
Alternatively, FMA may identify specific design elements, as well as institutional capacity
components of country systems that are for FM. In many cases, however, the PIU will
assessed as less risky and could be used for only be established towards the end of the
project implementation. design phase, and thus, as described below, FMA
(c) An assessment rated ‘low risk’ implies, in will have a significantly different focus to that
normal circumstances, that the country carried out on an existing unit.
PFM systems should be used and that 19. Staff should apply inherent risk assessment
the project design should be developed as the basis for deciding how far the country
accordingly. The decision at project level or sector FM systems and processes can be
could, however, be influenced by any used for project purposes, Project purposes,
previous experience IFAD has had with the and the specific risk mitigation measures that
implementing entity. are required. The inherent risk assessment
16. Identifying the entity responsible for FM of performed will vary depending on whether or
the project. Once the key decision on project not the PIU is already established.
implementation arrangements is made, FMD 20. FMA where the PIU exists
staff can begin project-level FMA of the entity or
(a) Staff should aim to identify the key risks
unit that will provide the FM function.
and vulnerabilities facing the project
17. Initially, it is necessary to ascertain which by focusing on the internal control
entity or unit will be the prime focus of the environment in the implementing entity or
assessment. For example, in a scenario where the unit and on designing the proposed funds
flow arrangements.
9 A ‘control risk’ is the risk that the controls put in place for financial management do not provide the assurance needed
regarding the use of funds.
10 FM arrangements would be ‘appropriate’ if the executing and/or implementing agency will have sufficiently strong FM
systems and controls in place to properly manage, control and report project finances, so as to ensure that project funds are used
economically and efficiently for the purposes intended.

28
(b) FMA should follow a structured approach, (g) The Financial Management Assessment
and staff must use professional skill Questionnaire (FMAQ) should be used as
and judgement to focus on the financial the basis for structuring the assessment and
controls specific to the entity or unit being to collect the basic data needed (see exhibit
assessed. D-1/A Detailed FMAQ Project Fiduciary Risk
Assessment at Design).
(c) FMA will cover the following key
FM elements: 21. FMA where the PIU is not yet established

(i) Organization and staffing; (a) B/Rs often create new, dedicated PIUs
specifically to execute IFAD-financed
(ii) Budgeting (systems for annual budget
projects. These units are often not
preparation and monitoring of
established, and consequently are not
execution);
operational, until funding for the project
(iii) Funds flow and disbursement is about to begin. In these circumstances,
arrangements; the actual FM systems will not exist in the
initial stages of project preparation.
(iv) Internal controls;
(b) Thus FMD staff should initially focus
(v) Accounting systems, policies and
on the adequacy of proposed FM
procedures (including information
arrangements and review whether the
technology [IT] systems);
action plan prepared by the B/R to
(vi) Reporting and monitoring; implement the proposed arrangements and
(vii) Internal audit; mitigate identified risks is reasonable and
whether sufficient capacity and resources
(viii) External audit. will be available to implement it. FMD staff
(d) FMA should: should advise on conditions to be included
in the FA to ensure that the project will
(i) Assess the level of fiduciary risk and
have adequate FM arrangements in place
be proactive in identifying actions to
by the time project implementation begins.
mitigate identified risks, as well as
implement and maintain satisfactory (c) A review should take place prior to the
FM arrangements; and beginning of disbursements to ensure
that the expected FM arrangements are in
(ii) Address the project’s FM supervision
place and/or that conditions precedent to
approach (scope and frequency).
withdrawal have been satisfied.12
(e) Staff should design and flow-chart the
(d) The modified FMAQ should again be used
funds flow arrangements, including any use
as a checklist of issues to be considered in
of the country’s treasury system (i.e. single
the development of FM arrangements. FMD
treasury account) and imprest accounts
staff should play a proactive role in the
(both primary and secondary).
development and finalization of the PIU
(f) Also as part of FMA, staff should agree organizational structure by constructively
with the implementing entity or unit on commenting on initial plans, including FM
external audit requirements to ensure that aspects, implementing arrangements and
they are in accordance with IFAD policies.11 the nature of eligible expenditures.
A review should be performed of the draft
audit terms of reference (TORs) to ensure
that the scope and nature of the audit are
appropriate and that the proposed auditor
satisfies IFAD’s criteria.

11 Refer to Operational Procedures for Project and Programme Audits (revised December 2011) – see module I.
12 This short review could take place during the project start-up workshop.

Module D
A 29
(e) FMD staff should complete the PFR (ii) It creates a structured framework for
assessment table and base all conclusions assessing primary data, which is the
about risk levels on the finalized basis for identification of risk and of
organizational structure plan. They should mitigation measures.
also ensure that the CPM receives the
(b) It is, however, clearly impossible for a
draft report at the end of the mission, as
single questionnaire to adequately cover
relevant extracts may be needed to agree on
the diversity of all IFAD operations. Thus
risk-mitigating actions and corresponding
the controls listed in the FMAQ should not
covenants where appropriate.
be viewed as definitive. FMD staff should
(f) FMD staff should not focus solely on use professional judgement to focus the
proposed arrangements within the PIU, as FMAQ on the internal control environment
certain control aspects to be assessed are specific to the entity being assessed. In
outside the PIU’s scope. For example, funds other words, FMD staff should add, delete
flow arrangements, asset management or modify the questions as appropriate.
systems and external audit arrangements.
(c) Where possible, the FMAQ should
22. FMA requirements with multiple initially be completed by the B/R on a
implementing entities self-assessment basis. Before the PIU even
exists, FMD staff should prearrange to meet
(a) Where project requirements indicate the
the head of the finance function within the
need for multiple implementing entities,
entity (LPA or ministry of finance staff) to
which is typically the case when a project
explain the basis of the assessment and to
covers several regional areas or discrete
talk through the issues. Even though this
subcomponents, FMD staff must ascertain
initial meeting will be pitched at a high
if these entities will be responsible solely
level, the head of the finance function may
for technical issues, such as monitoring
be reluctant or even unable to answer all
contractor performance, or whether
questions without support. Thus the most
responsibilities will also include cash
effective and most time-efficient basis is
disbursements and financial reporting.
often for FMD staff to work with entity staff
(b) Where the second-tier entity has a purely to ‘jointly’ complete the FMAQ. The key
technical role, there is no requirement to point is that FMD staff must involve entity
undertake an FMA at this level, as a detailed staff and must ensure that the head of the
assessment is only required at the level finance function is briefed on and agrees
at which project funds are managed and with the findings. If the FMAQ is completed
controlled. However, where funds do flow as a self-assessment, then FMD staff should
down to the second-tier level, an FMA must review the responses.
be completed on each individual entity,
(d) Under either approach, it is essential that
together with a review and identification of
FMD staff validate the information received
proposed funds flow arrangements between
by undertaking a physical review of the
the LPA (usually the controlling PIU) and
selected activities. For example, ‘walking
the second-tier entities, in order to consider
through’ information relating to bank
the need to establish first- and second-
reconciliations, fixed asset registers and
generation imprest accounts within the
accounting for new projects, as follows:
flow and to assess the risks involved.
(i) Bank reconciliations are completed on
23. Financial Management Assessment
a timely and regular basis. In order to
Questionnaire (see exhibit D-1/A Detailed
be satisfied that this is actually the
FMAQ Project Fiduciary Risk Assessment at Design)
case, FMD staff should examine the
(a) The FMAQ fulfils two key functions: actual monthly reconciliation working
(i) It provides a basis for the initial self- papers to check timeliness and
assessment, by the B/R, of existing FM comprehensiveness of the work.
arrangements; and

30
(ii) An integrated fixed asset register is (i) Clearly, some issues will be more
used and all accounting entries are up significant or pose a greater risk than
to date. Verification should include others. Thus FMD staff must look
checking that: the register is operative at the materiality and underlying
and its content is complete; monthly cause of each ‘weak’ rating – it
updating procedures are complied may be that ratings of subsystems
with routinely; account reconciliations covered by the average score are all
are performed regularly; and balances weak or perhaps it could be that just
shown in the register reconcile with one poorly performing subsystem
balance sheet values. is pulling the average score for the
indicator down. FMD staff must make
(iii) The accounting system can accommodate
a judgement on each indicator of
new projects. Verification should
whether implementation of mitigation
include review of: the structure of the
measures can minimize the risk to the
chart of accounts to ascertain the level
point where it can be reduced from
of detail that can be captured; how
‘high’ to ‘medium’.
previous projects have been treated;
and monthly financial reports. (ii) Mitigation actions could be, for
example: (a) filling of currently
(e) It is important to note that FMD staff
vacant staff posts in the finance or
should work with counterpart staff
treasury departments, or appointment
throughout the validation exercise to
of additional qualified and/or
develop a shared understanding of results.
experienced staff in these departments;
24. Assessing overall project FM risk (b) obtaining assurance from the
B/R that key staff currently in the
(a) Where an FMS performs the work, s/he
posts will not be transferred before
should finish the FMAQ by completing
the end of the project; (c) initial
the Summary of PFR Assessment at Design
staff training; or (d) improvement
table (exhibit D-1 Summary of Project
of financial accounting or treasury
Fiduciary Risk Assessment at Design (table)) –
management systems, which could
entering against each element the assessed
include implementation of proprietary
level of risk (i.e. high, medium, low) – and
accounting software or revisions to the
should summarize the overall level of
chart of accounts. Similarly, mitigation
risk, providing additional comments as
action may be focused on project
appropriate.
implementation arrangements.
(b) Where FMD staff perform the work, the
(iii) Timing is an important factor in
FO should use the FMAQ as the basis
the determination of recommended
for completing the Summary of PFR
mitigation actions. FMD staff should
Assessment at Design table.
agree on actions and time targets
25. Mitigating fiduciary risk during design, and reflect these in the
(a) Regardless of which project organizational FMA. Actions considered more critical
model is established or proposed, FMD in putting accountability in place
staff may conclude that some degree of before funds are disbursed may be
institutional strengthening or capacity proposed as covenants in the FA.
development is required. They should thus (b) It is important at this stage in the process
detail the particular weakness to address that FMD staff discuss any weaknesses
and specify the type and level of mitigating and any proposed mitigation actions with
action or support needed. the B/R. Thus actions needed to ensure
appropriate FM arrangements should be
agreed on and put in place by the start of
the project. The format and frequency of
proposed financial reporting should also
be developed and agreed with the PIU.

Module D
A 31
26. Use of country FM systems13 national systems are not found suitable for
use by the project, the PDR must contain a
(a) IFAD is committed to implementing
description of specific arrangements to be
international agreements on aid
implemented at the project level to satisfy
effectiveness;14 and, in the context of this
IFAD’s requirements.
strategy, to aligning IFAD procedures and
practices with country systems.15 27. Documenting the results of FMA. Assessment
results should be documented in an FMA report
(b) However, IFAD also has to be continuously
filed together with the FMAQ as a working
mindful of its fiduciary obligations16 and to
paper in FMD records. Results of FMA and the
recognize that reliance on country systems
proposed FM project arrangements are presented
can increase risk. Thus careful assessment
in a separate annex to the PDR (exhibit D-2
is needed of country PFM systems
Summary of Financial Arrangements (annex 7)).
generally, and of fiduciary risk at sector
and project levels. IFAD balances these two 28. A summary of the risk factors and mitigating
requirements by: actions is also included in the President’s report.
It is not enough to ‘suggest’ risk mitigation
(i) Using country PFM systems, where
actions. IFAD must have agreed on action plans
feasible, during implementation of
with B/Rs during project design. Where IFAD
IFAD projects; and
proposes binding conditions for these actions
(ii) Obtaining reasonable assurance that (e.g. as withdrawal conditions), these must
project funds will be used for the be clearly referred to in annex 7 and in the
purposes intended by assessing FM President’s report.
arrangements during the preparation
29. Where projects are scaled up or additional
and implementation of each operation
financing is approved for an existing project (see
and, where relevant, requiring the B/R
module B), the PDR should clearly refer to cases
to mitigate risks posed by identified
where FM arrangements worked in the past and
weaknesses.17
where they did not.
(c) IFAD’s FM strategy acknowledges that
30. The FMA report should:
the use of country systems involves a
judgement, based on a comprehensive and (a) Either provide full assurance – signifying
context-specific assessment of fiduciary risk that there are sufficient, relevant, positive
in each case. assurances to confirm the effectiveness of
key controls;
(d) Thus, when country or specific project
circumstances demand some degree (b) Or indicate any weaknesses in financial
of ring-fencing, FM staff18 will design and internal control systems and propose
project implementation arrangements appropriate mitigation actions to remedy
that satisfy fiduciary requirements, but the shortcomings. In particular, the report
which are designed to strengthen (rather must identify specific project design or
than undermine) country FM systems. For implementation features that carry high
example, any PIU should be established risk and may need monitoring during
to supplement rather than bypass the implementation.
country’s regular PFM systems. Where
13 These may include, for instance, country treasury management systems such as single treasury accounts, budgets, integrated
financial accounting systems, internal audit institutions, administrative procedures for authorization of expenditures or SAIs.
14 The Rome Declaration on Harmonisation (2003), Paris Declaration on Aid Effectiveness (2005), Accra Agenda for Action (2008)
and Busan Partnership Agreement (2011).
15 In most cases, the project will be implemented by a PIU staffed by permanent government personnel, supported, if necessary,
initially by external consultants. It would be categorized as ‘using country systems’, regardless of whether the PIU is located within
a government ministry or is established as a stand-alone unit. Alternatively, if the PIU is ‘ring-fenced’ (see module D.3, paragraph
14(c)), it would not be categorized as ‘using country systems’.
16 ‘Fiduciary risk’ as used in IFAD means risk that IFAD financing is not used for the intended purposes, for example due to: theft,
fraud, corruption or diversion of funds to other uses. It also includes the risk that funds will not be spent efficiently and economically.
17 The Agreement Establishing IFAD requires that the Fund make arrangements to ensure that the proceeds of any loan or grant
are used only for the purposes intended, with due attention to considerations of economy and efficiency.
18 These may be FMD staff and/or FMSs with appropriate qualifications and experience. Their work will be closely supervised by
FMD. Guidance on QA of work done in the field will be issued subsequently.

32
31. An indicative structure for the report would be: 32. The report should be as concise as possible,
commensurate with satisfying the CPM and
(a) Executive summary, which should include
FO that sufficient work has been undertaken
the PFR assessment table and a concise
for IFAD to be able to rely on the conclusions
summary of the assessment’s overall
drawn.
findings, conclusions and proposed
mitigation actions; 33. The FMA report should also provide the
minimum information required to adequately
(b) Brief summary of the organizational
describe and assess the project’s FM systems.
structure in place, or to be established,
Any weaknesses or gaps identified during
that will control and manage project
the assessment should, where possible, be
financial issues;
adequately mitigated, and the action plan for
(c) Detailed section highlighting the addressing them must be agreed with the entity
primary strengths and weaknesses of FM responsible for project implementation.
arrangements (for existing entities only),
34. Supporting documentation. FMD staff should
including actions needed to address
make brief notes of findings and relevant
weaknesses, which should support the
evidence that supports the conclusions.
conclusions in the executive summary;
(a) In determining the level of documentation
(d) Section summarizing proposed funds flow
to be prepared and retained, FMD staff
and disbursement arrangements;
should consider what another IFAD
(e) Section identifying relevant issues that may staff member or FMS, with no previous
need to be included in the FA; experience of the assessment, would need
(f) Section highlighting FM inputs to be in order to gain an understanding of
included in the overall project supervision the work performed and of the evidence
plan;19 and supporting the conclusions reached.

(g) Appendices containing the finalized FMAQ (b) The CPM and FO should retain the
and PFR assessment table. working papers at the end of the
assessment.

D.4 Designing project FM arrangements


35. The FMA is one of several inputs that together to use in-house FM systems with the support
provide the basis for finalizing project of experienced external specialists. Thus FMD
implementation arrangements. The FO’s staff, where possible, should propose mitigation
work should focus on identifying risk and activities that enable the use of in-house
risk-mitigating actions that, where possible, systems. The proposed arrangements should be
will enable use of PFM systems, rather than outlined for all FM components.
creating a parallel (ring-fenced) set of new FM
37. The FO should consider the following, at least,
arrangements specifically for the project.
when designing FM arrangements for a project:
36. Maximum use of in-house FM systems
(a) FM organization and staffing
and procedures will be achieved where the
implementing entity or unit manages the (i) Identification of key financial staff
project within the existing organizational positions that will maintain financial
structure, using either an existing in-house accounts; the capability20 of these
PIU or a new, dedicated PIU staffed by its staff members to fulfil FM needs
own resources. Where some FM weaknesses in all participating implementing
have been identified, it may still be possible organizations and locations of the
project, and when the positions are
expected to be filled;
19 For further details, refer to Guidelines: Supervision and Implementation Support of Projects and Programmes Funded from
IFAD Loans and Grants (September 2007).
20 Confirm how many staff with accounting qualifications and/or experience are/will be available.

Module D
A 33
(ii) Availability of clear job descriptions (iv) Comments on the appropriate
for key project positions, including banking arrangements: location of
fiduciary positions. Descriptions of the DA;23 locations where project
contract types for staff. local currency bank accounts
will be needed; consideration of
(b) Budgeting
appropriate operating authorities;
(i) Description of budgeting specification of which accounts
arrangements, that is, is the project will be pooled24 and which will be
included in national fiscal budgets? segregated. Requirements for the first
If so, how will budget appropriations disbursement must be specified.
be released for the project during
(d) Internal controls
implementation? Will financing be
included in government budgets at (i) Description of key internal controls
central and state levels or in budgets of over commitment and authorization
other participating organizations? of main expenditures. Any special
documentation requirements for
(ii) Description of the information systems
vulnerable expense categories must be
used for budgeting purposes. Will
specified;25
these be integrated with accounting
systems? (ii) Assessment of the status of the project
implementation manual (PIM) in the
(c) Disbursement arrangements and flow of
PDR for implementation readiness;
funds
whether there are other manuals
(i) Description of the complete funds available; and whether government
flow, and accountabilities, preferably procedures will be used or not;
also in flow chart format.21 Inclusion
(iii) Segregation/independence of
of disbursement/withdrawal
functions for accounting, payments
arrangements from IFAD and other
and procurement.
financing sources and downstream
fund flows to intermediaries and end (e) Accounting systems, standards, policies
beneficiaries; and procedures
(ii) Specification of funds flow (i) Description of key policies and
requirements for all financing sources procedures that demonstrate the
including counterpart funding and adequacy of the plan for the project
cofinancing; frequency at which funds FM system;26 whether these are
are likely to be drawn down;22 documented;27 provision of comments
on the accounting standards28 to
(iii) Brief description of disbursement
be followed and if these will be
methods, proposed SOE thresholds,
acceptable to IFAD;
DA AAs and any unique funds flow
circumstances or requirements;

21 Upstream flows from IFAD to borrower, and downstream flows from borrower to intended beneficiaries or expenditure points.
22 Refer to module H procedures and confirm consistency.
23 Central or commercial bank, or treasury single account codes.
24 For funds from IFAD and other donors or beneficiaries.
25 Consider the risk of misuse of funds under each category, and determine accounting evidence that may be necessary to
confirm that funds reach intended beneficiaries. Special documentary requirements may be needed when funds pass through
intermediaries before reaching beneficiaries. If so, these requirements should be communicated to ACD through the FMDB tool.
26 Specifically confirm whether cash, modified cash or accrual accounting standards will be adopted; if the unit has sufficient
capacity and experience with these standards; and whether accounting will be on a double or single entry basis.
27 If documentation is not available for a new PIU, this should be stated and included in the action plan.
28 Accounting standards acceptable to IFAD include the International Public-Sector Accounting Standards (IPSAS) and the
International Financial Reporting Standards (IFRS). Refer to module G.10 for additional guidance.

34
(ii) Confirmation of whether an (iv) Identification of whether the internal
automated accounting software audit function exists, or is proposed,
package will be used for project and if it has adequate capacity
accounting purposes and its suitability and coverage. If not, alternative
for project accounting. Comments on arrangements can be proposed. The
how the system will ensure that all institutional arrangements to be
financial transactions at all spending applied must be specified.
entities/locations will be recorded
(g) External audit
promptly into project accounting
systems. Assessment of the system for (i) Brief overview of the SAI or private-
required built-in controls (see exhibit sector audit firm33, including
D-3 Checklist for evaluating project assessment of whether audit firms are
accounting software); licensed and whether international
firms are present in-country.
(iii) Description of the adequacy
Specification of required qualifications
of processes for recording and
of external auditors and of standards
safeguarding project fixed assets;
to be accepted;
(iv) Accounting systems, standards, policies
(ii) Description of the scope of external
and procedures must be assessed at
audit, including addressing key
both central and decentralized project
assurance issues;34
locations. Comments on how other
funds – contributed by beneficiaries, (iii) Other than the financial audit,
government or cofinanciers in specifications of other audits if
cash or expenditures prefinanced necessary (e.g. operational or
by beneficiaries or participating performance audits).
organizations – will be captured in 38. Regardless of which project organizational
the accounting system.29 Comments model is established or proposed, FMD may
on accountability mechanisms and conclude that some degree of institutional
the basis for valuing and recording strengthening or capacity development is
contributions in kind and government required. They should detail the particular
counterpart funding. weakness to be addressed and specify the
(f) Financial reporting type and level of support needed. The FO, in
consultation with the CPM, should decide
(i) Description of the financial reporting
what, if any, actions should be taken towards
systems, frequency and content, and
institutional strengthening or capacity
of the ability to report on project
development, and how they should be
expenditures;30
implemented. The FO should also always
(ii) Identification of financial reporting ensure that the FMA report is reviewed prior
standards to be used;31 to financing negotiations – to assess progress
in implementing the ‘agreed on’ strengthening
(iii) Internal audit;32
arrangements and to determine which, if
any, covenants or conditions precedent to

29 Define how the FM system will ensure that expenditures are recognized and recorded in the accounting system only when
these are incurred.
30 Minimum financial reporting should normally include source and use of funds, reporting by expenditure categories and
components, and comparison with budgets. Suggested formats should be included in the PIM. Confirm frequency of interim
financial reporting (quarterly or semi-annually).
31 IFRS (normally applicable for revenue-earning entities) or IPSAS (normally relevant for public-sector or government reporting), or
other accounting and reporting standards.
32 If the function does not exist and if there is no agreement to arrange this coverage of project activities, the risk rating should
normally be ‘high’ for this component.
33 Based on the assessment, state whether an SAI will be used or private-sector audit services procured. If the latter, confirm that
the IFAD Guidelines on Project Audits will be followed, especially with respect to timeliness and quality. Confirm compliance with
module I procedures.
34 Refer to the standard template for TORs for the audit.

Module D
A 35
first withdrawal must be included in the FA 41. CPI score. The latest country assessment of the
so as to ensure that the project will have Transparency International CPI, which ranks
adequate FM arrangements in place by the time more than 150 countries by their perceived
implementation begins. levels of corruption, should be used as the
source of prime data. The CPI ‘scores’ each
39. In all cases, the FO is responsible for preparation
country from 0 to 100, as determined by
of the LtBs. Draft FAs should be cleared by the
expert assessments and opinion surveys. The
FO and LEG prior to negotiations to confirm
corruption risk assessment is obtained from the
that all covenants and instructions related to
following table:
appropriate FM risk-mitigating actions and
disbursement arrangements have been properly 56 – 100 Low risk
reflected in these documents. It is mandatory 31 – 55 Medium risk
that the FMD FO participate in negotiations and
30 and below High risk
clear the draft minutes of the negotiations.
In general terms, the higher the risk, the more
40. For each project, as part of overall
overtly FMD staff should seek to ensure that
implementation arrangements, FMD staff
appropriate FM arrangements are, or will be,
should develop an FM supervision plan,
in place at the project level. In accordance
based on an initial evaluation of the risks
with IFAD procedures, additional controls are
assessed during FMA. The plan should
mandatory for high risk projects.
include specification of project FM reporting
requirements, and it should also set the 42. RSP score. IFAD’s RSP score35 provides a
frequency and focus of on-site review visits. focused assessment of potential risk in the rural
It should highlight key risk factors to be sector in which IFAD operates. It provides an
specifically monitored and how compliance appreciation of the performance of rural sector
with covenants will be monitored. The FM institutions and policies. The RSP score is rated
supervision plan should be coordinated with as follows:
the CPM, FO and other members of the CPMT
4+ Low risk
and be an integral part of the overall project
3.1 – 4.0 Medium risk
supervision plan.
3.0 and below High risk

D.5 Database of risk ratings


43. The Financial Management Dashboard (FMDB) form the basis for periodic review of risk ratings
contains all individual project risk ratings under of regional portfolios by FMD team leaders and
the custodianship of the regional team leaders the Director, FMD, to ensure consistency within
and can be accessed through the following link: and across countries. The database of risk ratings
FMDB. FOs create a new project record in the was set up with version control, which provides
database of risk ratings by following the primary an audit trail of changes. For version control to
project details as soon as the concept note is function, the process is as follows:
approved by the OSC. The record is updated
• Open the file by ‘Checking it out’;
no later than the date of the QA meeting that
considers the project for submission to the • Make and Save changes;
President. FOs also update risk ratings during • Close file, at which point you will be
supervision and record changes in the FMDB prompted to ‘Check in’–click on Yes;
promptly after completion of mission reports.
• You will now be prompted to comment on
44. Periodic reports can be generated from the the changes made, at which point you can
FMDB on risk and performance profiles for do so.
individual or groups of projects. These reports

35 See footnote 30.

36
D.6 Risk-based disbursement – design
of disbursement arrangements
45. The objective of the risk-based disbursement 46. Disbursement arrangements include the
methodology is to ensure that the procedures proposed disbursement methods, designated
for preparation and submission of WAs by B/ bank accounts, documentation thresholds
Rs, and their scrutiny at IFAD, are aligned (e.g. SOEs) and any conditions precedent to
with identified, documented fiduciary risks. withdrawal or specific covenants related to
The use of a structured assessment of FM risks accountability. Risk factors to consider when
enables IFAD to place ex ante scrutiny of WAs designing disbursement arrangements for a
within a broader array of available assurance project are summarized in the following two
mechanisms, such as FM arrangements, audits, tables:
field supervision and ex post reviews of WAs.
Thus this methodology can yield efficiencies in
the processing of disbursement requests by B/Rs.

Disbursement aspect Relevant FM risk factors


1. Disbursement methods
When to authorize advances Nature of expenditure
When to authorize direct payment Country inherent risks
Fiscal capacity, entity control environment
When is reimbursement appropriate?

2. Designated account
Where is it located? Country inherent risks
Initial advance/AA Selection of bank for DA: commercial or central bank,
or treasury single account
Ceiling for advance
Project design
Frequency of reporting/justification
Responsibility for managing DA: PIU, LPA or ministry of
Imprest vs. revolving fund finance (if high risk, DA to be held at central level)
Number of DAs needed Denomination currency of financing
Currency of DAs Accounting capacity
Reporting and monitoring of local cash imprest
balances. Size of AA normally from 3 months’ (high
risk) to 12 months’ (low risk) average expenditures
based on risk rating
3. Advance justification
Supporting documentation: when, what? Accounting capacity
SOE thresholds Internal controls (past audit feedback on financial
controls; past disbursement experience)
Customized SOEs
Nature of expenditure and corresponding risks and
Summary financial reports impact of control failure
Reporting and monitoring
4. Minimum application sizes for diverse disbursement
methods
Judgement of risk, compensating controls;
recommended frequency of WAs
Size of direct payments should be relatively high and
restricted to ‘high-value, lump-sum’ contracts
5. Authorization of applications
Borrower authorization procedures provide for internal
oversight

Module D
A 37
Disbursement arrangements Considerations Some measures to strengthen
assurance
Disbursement methods Appropriate to project design, for Methods aligned closely with legal
timely availability of funds agreements (e.g. financing plan and
Meet requirements of procurement schedule 2), reflected in LtB/R
plan, fiduciary accountability Strengthening of implementation
arrangements, capacity and fund-flow relationships between
Simple national agencies and regional
entities
Type of financing plan (e.g. parallel
or cofinancing) Consistent, clear definition of ‘eligible
expenditures’ in various documents
Fiduciary risk assessments
consistent for each country/agency
Selective use of direct payments
Minimum WA size varies with
risk rating
DA facility: location, AA, frequency of Cash flow projections Documented and realistic
applications, minimum size Roles of various project expenditure forecasts
implementing entities, including DAs consolidated/pooled, with
fiduciary roles multiple project accounts if needed
Supporting documents for Capacity to produce SOEs with Quarterly submission of WAs
justification audit trails Customize SOE to include audit
Arrangements to ensure adequate trail for recipient, cofinancing
financial controls percentage, nature of expenditure to
Kinds of accounting records in terms be financed by other financiers
of feasibility, necessity Copies of accounting records for
Existence and effectiveness of higher-risk expenditure categories
internal audit Semi-annual SOE audits
Withdrawal conditions Readiness: for entire project or Clearer definition of ineligible
specific components/categories expenditures
Completion of specific risk mitigation
steps before first disbursement,
such as recruitment of key project
FM staff
Clearance of FM manuals (PIM)
by FMD

47. The specific disbursement arrangements there is alignment of project preparation


proposed for a project should be reflected in its schedules, opportunities should be sought
LtB/R. for sharing fiduciary risk assessment,
conclusions reached and, particularly,
48. At the time of WA processing by ACD, the
agreeing on mitigation actions required.
project’s fiduciary risk and WA characteristics
In this case, a lead donor should be
(size and disbursement method) will determine
nominated for the purpose.
the level of checks to be performed on the
WA during disbursement. For instance, direct (b) When cofinancing is to be undertaken
payment and SC WAs will be scrutinized jointly with IFAD funds and to be
rigorously in each case. The underlying administered by IFAD, risk assessment and
principle is that, even in cases of accelerated the proposed FM arrangements should
disbursements for WAs linked to projects cover all financing, including non-IFAD
assessed as low risk, an appropriate level of sources. Options for harmonized financial
controls must be applied in order to effectively reporting and auditing among cofinanciers
mitigate the risks. For further details, refer to should be explored. These aspects
module H. should be specified in the project design
documents and FAs, with appropriate
49. Cofinancing arrangements
covenants when appropriate.
(a) Where IFAD is planning parallel
cofinancing with another donor and

38
D.7 Approval processes
50. The FO is responsible for completion of the 51. The FO should attend the Executive Board
following tasks prior to presentation of the session on the day the specific project is on the
project to the Executive Board for approval: agenda, and should brief the Director, FMD,
and team leaders on any advance queries raised
(a) FM contribution to the design report
by Board members and on major political,
completed and reviewed (annex 7);
fiduciary and economic developments in the
(b) Summary of the FMA report and mitigating country. If the FO is outposted, an alternate
actions included in the President’s report, headquarters-based substitute will attend,
along with the table on project expenditure in which case a full written brief should be
and the financing plan (exhibits C-3 completed beforehand. When LOT procedures
President’s report (fiduciary template) and D-1 apply, the FO must coordinate responses to
Summary of Project Fiduciary Risk Assessment queries raised by Board members with the CPM.
at Design (table) show the President’s report
template and the Summary of Project
Fiduciary Risk Assessment at Design);
(c) Draft LtB/R completed;
(d) Project overall FM risk rating entered in the
FMDB;
(e) Negotiations normally completed before
the Board presentation date. The FO
must ensure that changes arising from
negotiations, as reflected in the signed
minutes and FA, are suitably reflected in
the President’s report and design report,
making them consistent.

Module D
A 39
THE FINANCING AGREEMENT AND ITS
NEGOTIATION PROCESS MODULE E
Module E
The financing agreement and its negotiation process
• Financing agreement
• Key dates and FA terms
• Fulfilment of conditions precedent to withdrawal
• Start-up costs
• Retroactive financing
• Disbursement arrangements
• Project completion date
• Financing closing date
• Counterpart funds and project accounts
• Grounds for suspension of withdrawals
• Expenditure allocation table
• Considerations for cofinancing
• Category allocation amounts and percentages
• Signing of the financing agreement
• Financing of taxes
• Letter to the borrower/recipient

42
E.1 Financing agreement
1. Financing for a particular project is provided 3. LEG is responsible for preparation of the draft
through an FA between IFAD and the B/R. Loan FA for negotiations, assisted by the CPM and the
component grants are also included in the FA. FO, and for its finalization after negotiations.
The new model FA is subject to the revised Exhibit E-1 Model Financing Agreement provides
General Conditions approved by the Executive the model FA used in conjunction with the
Board in April 2009, as amended in 2010, 2013 General Conditions. All capitalized terms
and 2014. All references in this manual to used in the FA, which are not defined in it,
‘General Conditions’ relate to the latest edition. are defined in section 2.01 of the General
Conditions.
2. All standard clauses applicable to FAs are
contained in the General Conditions. Each FA
contains only the provisions and details that
change from one project to another.

E.2 Key dates and FA terms


4. Entry into force. There are two key dates to project expenditures become eligible
consider: the date of entry into force of the for financing, unless the FA includes an
FA, and the date that IFAD determines that all exception to GC section 4.08 allowing
general conditions precedent to withdrawal1 expenditures incurred before that date
have been fulfilled in accordance with GC to be eligible for financing (‘retroactive
section 4.02(b). financing’). As of the entry into force
date, withdrawals may be made from the
(a) The date of entry into force of the FA
loan account, subject to the conditions of
is defined in GC section 13.01 as “…
withdrawal (GC section 4.02(b)). 2
the date when both the Fund and the
Borrower/Recipient have signed it, unless (c) Entry into force is officially notified to the
the Agreement states that it is subject to B/R through a fax prepared by LEG, cleared
ratification, in which case …” it is “… the by the CPM and FMD and signed by the
date the Fund receives an instrument of divisional director. The fax, which is sent
ratification.” If IFAD and the B/R sign the by the division, specifies the date of entry
FA separately, the relevant date is the date into force, the project completion date and
of the last signature. the financing closing date.
(b) The date of entry into force of the FA is the (d) FMD must notify ACD at the time of entry
beginning of the project implementation into force so as to maintain the relevant
period, and in accordance with GC financial dates in FXC.
section 4.02(a), is the date after which

1 The date on which ACD receives written confirmation that the withdrawal conditions have been fulfilled is recorded in the FXC
as the ‘disbursable date’.
2 Payments related to start-up provided for in the FA may be made prior to fulfilment of conditions precedent to withdrawal for
expenditures incurred after the date of entry into force.

Module A
E 43
E.3 Fulfilment of conditions precedent
to withdrawal

5. GC section 4.02(b) provides that no withdrawal activities – may be set out in section E of the FA.
shall be made from the loan and/or grant Based on FMAs conducted by FOs, FMD may
accounts until the first AWP/B has been propose additional conditions of withdrawal to
approved by the Fund and IFAD has determined ensure that essential financial arrangements are
that all other conditions specified in the FA established before funds are disbursed.
as additional general conditions precedent to
7. The date on which IFAD determines that all
withdrawal have been fulfilled. The FA may
general conditions precedent to withdrawal
also establish additional specific conditions
have been fulfilled, in accordance with GC
precedent to withdrawal applicable to particular
section 4.02(b), is the start of the maturity
expenditure categories or activities.3
period for loans granted on ordinary terms.
6. Approval by IFAD of the first AWP/B is a This shall apply even where a start-up advance
standard general condition of withdrawal has been disbursed. FMD must notify ACD once
that applies to all FAs. Other conditions the conditions precedent to withdrawal are
of withdrawal – either ‘general conditions’ fulfilled so as to maintain the relevant financial
applicable to all categories, or ‘specific dates in FXC.
conditions’ applicable to particular categories or

E.4 Start-up costs


8. GC section 4.02(b) provides for withdrawals 9. Project start-up costs may be withdrawn
for project start-up costs, which would include by submission of a withdrawal application.
preparation of the PIM, procurement of Detailed procedures relating to withdrawal
accounting software and recruitment of key and disbursement of funds are provided in
project staff. Start-up expenditure may be module H.
incurred before the AWP/B has been approved
and other general conditions precedent to
withdrawal have been satisfied, provided that
the FA has entered into force, and subject to
the limits established in the FA, if any. IFAD
encourages the use of start-up costs as a way
of accelerating implementation readiness.
Where it is deemed appropriate to limit the
maximum amount that may be so withdrawn
and the particular category(ies) or activities for
such start-up costs, these should be specified in
schedule 2 of the FA. Should further clarification
on the start-up advance be required it can be
explained in the LtB/R.

3 FMD staff may seek copies of documents relevant to conditions precedent to withdrawal – to confirm compliance – where
these relate to fiduciary aspects. ACD should be notified accordingly.

44
E.5 Retroactive financing
10. Definition. Project expenditures are eligible 13. Disbursement. Upon entry into force and
for financing if they are incurred on or after after fulfilment of conditions precedent to
the entry-into-force date (GC section 4.08). To withdrawal, eligible expenditures are reimbursed
facilitate prompt execution of financed projects, to the nominated bank account. The prospective
on an exceptional basis and with the approval B/R prefinances retroactive expenditures at its
of the Executive Board, the Fund may finance own risk. If the financing is not approved by the
project expenditures incurred by the B/R before Executive Board, or does not enter into force,
entry into force. This type of financing is known expenditures will not be reimbursed. The B/R
as retroactive financing (see exhibit E-2 Guidance should request reimbursement of retroactive
Note – Retroactive Financing). expenditures in a separate WA, so as to simplify
monitoring. The finance assistant will check
11. Maximum amount. The maximum amount
compliance of the expenditures incurred prior to
that may be withdrawn for retroactive financing
entry into force with the provisions of the FA.
may be a specific amount for each category or
a global amount for two or more categories, 14. Accountability. Retroactive financing must be
preferably expressed in the loan denomination recorded in the FM system of the project and
currency. This amount should normally included in its first financial statements, with
not exceed 10 per cent of total financing. If appropriate separate disclosure of the amount
exceptional cases arise, they should be reviewed in notes to the accounts. These expenditures will
on a case-by-case basis and approved by the be subject to external audit. FOs must specify
Director, FMD, and appropriate justification separately this in the audit TORs as appropriate.
disclosed in the documents prior to submission
15. Eligible expenditures. The date after which
of the project for approval by the Executive
expenditures become eligible for retroactive
Board. The category allocation table of the
financing should not be earlier than the project
FA (schedule 2) should specify the limits
design date. As the FA specifies the date after
(e.g. amounts, categories) applicable to such
which expenditures are eligible, it is preferable
retroactive financing in the denomination
to choose the last day of a month, particularly in
currency.
cases in which claims will be submitted on the
12. Disclosure and approval. Provisions basis of SOEs. In accordance with GC section
for retroactive financing are included in 4.08(a)(i), all such expenditures must meet the
section E of the FA or under Schedule 2 of the FA other criteria for eligibility.
as an exception to the General Conditions. To
be eligible for retroactive financing, expenditures
must meet the criteria for eligibility set out
in GC section 4.08. The proposed amount of
retroactive financing, financing source, eligible
date for retroactive financing, justification
and applicable expenditure category shall be
specified in the design document and disclosed
in the President’s report or in the minutes of the
loan negotations. The eligibility date should not
normally precede the date the project design is
approved by the QA group, unless another date
is mutually agreed and stated in the FA.

Module A
E 45
E.6 Disbursement arrangements
16. During negotiations, the FO will provide the funds) and timing, if applicable. Guidance is
B/R negotiating team with clarifications and also provided on SOE thresholds, minimum
guidance on all proposed project disbursement value and frequency of presentation of WAs
arrangements expected to be developed during for replenishments. Instructions on these
project design. These include set-up of the DA, disbursement arrangements are provided in the
project bank accounts, currencies and size of LtB/R, a draft of which should be submitted to
authorized allocations, funds flow for these the B/R for information (see section E.16).
(including those required for counterpart

E.7 Project completion date


17. This date is specified in section C of the FA, that date, “… except that expenditures to meet
usually as an anniversary of the date of entry the costs of winding up the Project …” may be
into force. It is rounded to the end of the incurred after the project completion date and
calendar quarter by IFAD for its own internal before the financing closing date (GC section
reporting purposes (i.e. 31 March, 30 June, 4.08(a)(ii)). For the purpose of determining
30 September or 31 December). The ‘project eligibility of expenditure, the term ‘incurred’
completion date’ is defined in GC section 2.01 in this context means that the legal obligation
as the date “on which the implementation of to procure goods, works or services must occur
the Project is to be completed.” It marks the before that date.4 In the same sense, credit lines
end of the project implementation period, and and matching grants must have been disbursed
eligible expenditures must be incurred before in line with schedule 1 of the FA.

E.8 Financing closing date


18. The ‘financing closing date’ is defined in GC 19. During the six-month period between the
section 2.01 as “… the date on which the completion and closing dates, the B/R can
right of the Borrower/Recipient to request submit WAs for expenditures related to
withdrawals from the Loan Account and/or activities completed prior to the completion
Grant Account ends, which is six (6) months date for processing by IFAD within this period.
after the Project Completion Date or such later Submission of WAs and additional information,
date as the Fund may designate by notice to for the purpose of justification5, beyond the
the Borrower/Recipient.” In accordance with Financing closing date may be granted on an
GC section 12.02(b): “Any amounts remaining exceptional basis, if deemed necessary by the
in the Loan and/or Grant Accounts shall be Fund or upon request from the B/R, for a further
cancelled on the Financing Closing Date, except six (6) months post-Financing Closing Date
for any unwithdrawn balances of applications (or longer if required), and subject to approval
for withdrawal received by the Financing of the Director, FMD and to the conditions
Closing Date and any amounts subject to under Module G.10 paragraph 55. Approval by
undischarged Special Commitments, which FMD should be obtained prior to the Financing
shall be cancelled upon the full discharge of Closing Date, however exceptions may be
such Special Commitments.” considered within the six (6) months following
the Financing Closing Date, at the discretion of
the Director, FMD. Expenditures for activities
4 See module G for procedures that apply to payment of winding-up expenses.
5 If the B/R wishes to withdraw funds beyond the six months period between completion and closing, a formal extension of the
Financing Closing Date is required by approval of the AVP, PMD.
46
contracted or undertaken after the completion staff needed to close the project, audit fees and
date are ineligible for financing, except for costs of the PCR). The CPM must agree on the
limited expenditures needed to wind up the details of closing expenditures with the project
project. These require prior authorization by before the Project Completion Date.6
IFAD (e.g. operating costs and salaries for core

E.9 Counterpart funds and


project accounts
20. Section B of the FA indicates the amount and 23. Project accounts are provided for in section B of
nature (in cash or in kind) of counterpart the FA. These accounts should not be confused
financing provided by the B/R. If all or part of with the DA – they are accounts managed by
counterpart financing is provided to pay taxes project parties (which could include the LPA,
or to reimburse the project for paying them, PIU or an NGO responsible for implementation
this should also be indicated. When counterpart of part of the project), and the purpose of
funds or a part thereof are provided in cash, mentioning them in the FA is to obtain a
the funds should usually be deposited in a covenant from the B/R that the financing will be
separate, dedicated project account, which made available to such entities. Although it Is
will be included in the audited financial not mandatory to disclose DA arrangements in
statements (AFSs). Provisions stipulating the the FA, it is good practice to do so in section B.
agreed modality for the timing and amounts
of counterpart funds to be deposited into this
account should be indicated in the LtB/R.
21. IFAD-financed projects may include other
sources of financing that contribute to project
development objectives, are integrated into
the PDR and are disclosed in the President’s
report. In such cases, the FA should indicate the
source and amount of such financing and the
basis for sharing the cofinanced expenditures.
Further instructions on the flow of funds and
accountability will be given in the LtB/R.
22. GC section 7.02(b) states, “The Financing
Agreement may provide that the Borrower/
Recipient open and maintain one or more
Project Accounts for Project operations ….” The
LtB/R shall specify the number and use of such
project accounts and shall identify the project
party responsible for operating them. Unless
otherwise specified in the FA, such accounts
shall be operated in accordance with the
applicable rules and regulations of the project
party responsible.

6 See module G for procedures that apply to payment of closing expenses.

Module A
E 47
E.10 Grounds for suspension of
withdrawals
24. IFAD is under no obligation to continue 27. GC section 12.01(a) (xxiii) also allows
providing financing for a project that is suspension if the B/R has defaulted in the
not successful. GC section 12.01 provides a performance of any of the special covenants
complete list of circumstances that allow IFAD listed in schedule 3 of the FA, provided that
to suspend “in whole or in part, the right of the default has continued for a period of 30
the Borrower/Recipient to request withdrawals days, and IFAD has determined that it has had,
from the Loan and/or Grant Accounts”. There or is likely to have, a ‘material adverse effect’ on
are 26 optional grounds for suspension listed the project.
(GC 12.01 (a)) (in addition to project-specific
28. Section E of the FA lists additional grounds for
grounds listed in the FA) and one mandatory
suspension specific to the project (GC section
one (GC 12.01 (b)) – failure to submit the
12.01(a)(xxvi)). FAs for projects cofinanced by
required audit report satisfactory to IFAD within
other donors generally include an additional
six months of the deadline.7
ground for suspension that allows IFAD to
25. GC section 12.01(a) provides broad grounds suspend in the event that the cofinancing
for suspension and allows IFAD to suspend partner’s FA has been suspended. Such a
financing if it determines that (v) “the Project suspension is not automatic, and IFAD is never
has failed to fulfil, or is unlikely to fulfil in a obliged to suspend simply because a cofinancier
timely manner, its purposes as stated in the has suspended. Each case should be considered
Agreement” or if (vi) “a situation has arisen on its merits by the CPM after consultation
which may make it improbable that the Project with LEG and FMD.
can be successfully carried out ….”
29. Suspension of an entire country portfolio may
26. A project-specific suspension is initiated when be exercised as a remedy in some circumstances
IFAD becomes aware of circumstances that when the B/R is engaged in a conduct that
justify suspension under a project and decides justify a portfolio suspension, such as force
to take remedial action. If the circumstances majeure conditions and overdue loan service
are related to poor performance, a decision payments. IFAD may suspend the entire country
memo is prepared, after consultation by PMD, portfolio, when a semi-annual loan service
FMD and LEG, giving the rationale and scope payment is overdue by more than 75 days,
of the suspension. This is submitted to the as per procedures outlined in module J.7
President for approval through the AVP, PMD. ‘Overdue debt service’.
The suspension may be restricted to a specific
component or to selected categories
of expenditure. For example, it may be
appropriate to restrict suspension for audit non-
compliance by one of several project parties
to the disbursement categories that fund that
party’s activities.

7 Guidance on this is available in module I.5.

48
30. Unjustified obligations. A number of grounds Counsel and cleared by SEC, FMD, PMD and
for suspension are grouped under the heading TRE is sent, informing the B/R of the decision
of ‘unjustified obligations’ – these include taken9.
failure to provide a refund of amounts advanced
31. A suspension is lifted once the conditions
but not used for eligible expenditures (ineligible
identified in the suspension notice have been
expenditure), failure to provide an audit report
met and are acceptable to the Fund. The same
by the deadline, or failure to provide a PCR.
authority that approved the suspension will
In such cases, IFAD may decide to suspend
have the authority to lift the suspension.10
disbursements under the specific project or the
See also module J, section J.7, paragraphs 40-41,
entire portfolio. An initial warning notice is
specifically related to the lifting of debt-service-
sent by the Director, FMD, cleared by LEG and
related suspensions.
PMD, 90 days after the B/R has been notified
of such unjustified obligations.8 In the absence
of satisfactory remedial action by the B/R,
90 days after the date of the warning notice,
the suspension notice signed by the General

E.11 Expenditure allocation table


32. Each FA includes a schedule 2 containing 33. Category descriptions. The PDR contains a
information on eligible expenditure categories full set of cost tables setting out estimated
(the ‘allocation table’). This schedule presents project expenditures, grouped into categories.
all basic provisions for withdrawal of financing To facilitate recording and uniform aggregate
proceeds, including designation of: reporting of expenditures in the FXC,
expenditure allocations are grouped into a
(a) Categories of expenditure eligible for
standard set of categories in schedule 2. For
financing;
administrative convenience, the allocation table
(b) Specific amounts allocated to each category should normally group expenditure allocations
and to each financing source; into no more than five of these categories, taking
(c) Percentage of eligible expenditures to be into consideration the materiality of amounts
financed under each category; allocated to individual categories. If a higher
number of categories are required in special
(d) Whether the above percentage is ‘net of circumstances, the Director, FMD, may provide
taxes’ or whether taxes are eligible for exceptional approval.
financing;
(e) If the project financing plan includes
other sources of finance, and the manner
in which eligible expenditure would be
shared.

8 See exhibit E-3 Suspension notice 90 days.


9 See exhibit E-4 Suspension notice 180 days.
10 See exhibit E-5 Suspension lifting advice.

Module A
E 49
34. Standard categories comprise the following:

Standard expenditure categories – loans and Comments


DSF grants
Consulting services  
Credit, guarantee funds Define in schedule 2 the nature of underlying
expenditure and credit losses, if applicable
Equipment & materials
Goods & inputs  
Grants & subsidies 11
Define in schedule 2 who will receive these grants/
subsidies and the end use of eligible expenditure
Operating costs Define kinds of underlying expenditure in schedule 2
Salaries & allowances  
Technical assistance  
Studies & workshops  
Training  
Vehicles  
Works Formerly civil works
Unallocated

Additional categories for all grants except DSF


Allowances
Audit
Communication
Contingencies
Contributions Define underlying expenditures for which contributions
are being made
Miscellaneous
Overhead/management fees
Project management

Studies & research

Travel & allowances


Workshops & meetings

Additional category for OFID12 loans, European Commission-funded grants and other supplementary funds
Project components

11 Grants as listed here are provided by the borrower/recipient using resources from the loan and are therefore not to be confused
with grants referred in Module K.
12 OPEC Fund for International Development (of the Organization of the Petroleum Exporting Countries).

50
35. FA schedule 2 should include a brief definition 37. The allocation table covers only IFAD-financed
for expenditure categories where these are not project expenditures. Project activities or
entirely clear, as this helps avoid any subsequent components not included in the allocation table
disagreement during disbursement regarding are fully financed by the B/R or through other
the eligibility of specific activities and their financing sources arranged by the B/R. However,
allocation to relevant categories. Expenditure for a comprehensive view of the financial
categories, their definitions and the amounts of position, in such cases financial reporting
financing allocated13 to each should reflect the should include all sources and use of funds that
structure and financing plan of cost tables and were disclosed for project approval.
the PDR. These definitions will help determine
38. Circumstances that warrant a more complex
the specific category of expenditure to which
category structure include:
expenditures linked to specific activities are to be
charged. Definitions are particularly useful when (a) Projects implemented by diverse agencies,
multiple sources of financing (e.g. beneficiary, each of which operates independently
counterpart or supplementary funds) are to be and requires separate allocations for
used for the same expenditure category, or when management control purposes;
there is room for ambiguity in the underlying (b) Activities that are subject to withdrawal
nature of eligible expenditures (e.g. operating conditions; and
costs). Schedule 2 should also specify other
provisions related to the withdrawal of financing (c) Critical activities for which the total
proceeds, such as retroactive financing or start- amounts disbursed should be limited
up costs, with their maximum amount (and (for example, an innovative component
corresponding categories), when these apply. involving experimental activities on a pilot
basis).
36. In particular, categories such as ‘operating costs’
must be clearly defined so that IFAD and the
B/R have the same understanding of eligible
items. In general, recurrent costs (salaries and
operating costs) should not exceed 15 per cent
of total project costs. Recurrent costs exceeding
this percentage should be adequately justified
during the project design approval process.

E.12 Considerations for cofinancing


39. For cofinanced projects, IFAD and the the IFAD FA should normally have a covenant
cofinancier should jointly negotiate for cross-effectiveness or cross-disbursement,
their respective FAs whenever possible. If specifically when the project being approved
circumstances do not allow this, the lead commits to development outcomes from the
financier’s FA should be negotiated first. combined financing. This must also be carefully
reflected in schedule 2 of the FA.
40. In the case of cofinancing arrangements where
other donors jointly cofinance IFAD projects,

13 Once the Executive Board has approved the facility, amounts allocated to each expenditure category are recorded in the FXC
and can only be varied or reallocated after a due process (see module F).

Module A
E 51
E.13 Category allocation amounts and
percentages
41. The amounts allocated for each category are currency units or more, and to the next 10,000
based on project cost estimates14 for the types denomination currency units for loans/grants
of expenditures involved and the relevant under 10,000,000 denomination currency units.
eligible disbursement percentages. The category
44. Disbursement percentages also take into
amounts are normally rounded up or down to
account any cofinancing arrangements, financial
the nearest SDR/denomination currency 10,000.
contributions by beneficiaries and counterpart
During project design, the amount of the
contributions by B/Rs. The percentages of
financing is calculated in US$.
expenditures eligible for financing are applied to
42. FMD calculates the SDR/denomination currency each invoiced expenditure as payments become
amount(s) of the total financing in the FA using due.
International Monetary Fund (IMF) exchange
45. GC section 4.07(c)(ii) allows IFAD to reduce
rates prevailing on the last day of the month
the disbursement percentage in the event that
preceding the date of the Draft for Negotiations
no further funds are available for reallocation
submitted by the B/R, provided the negotiations
to the category, so that further withdrawals
were concluded within the same month. In cases
under the category may continue until project
where no loan negotiations are held, such as
completion.
approvals subject to conditionalities or in the
case of additional financing, FMD calculates the 46. Unallocated funds. The allocation table often
SDR/denomination currency amount(s) of the includes an ‘unallocated’ category. The amount
total financing in the FA using the IMF exchange initially allocated to this category represents
rates prevailing on the last day of the month contingencies used to calculate the appropriate
preceding FMD final clearance (in scriptoria) of loan amounts and is generally 10 per cent of
the EB document. the total of each financial product. The amount
allocated to this category is not immediately
43. The total amounts of each financing
available for disbursement until this has been
instrument are rounded up to the next 50,000
reallocated to other categories as provided for in
denomination currency units for loans/grants
GC section 4.07.
amounting to 10,000,000 denomination

E.14 Signing of the financing agreement


47. After the Executive Board has approved the 49. If the right of the B/R to request withdrawals for
project and the B/R has completed any necessary another project has been suspended, or if IFAD
internal procedures prior to signature (such as has sent the B/R an arrears suspension notice
ratification of the FA if required), the FA can be (see modules E, G, H and I), the FA cannot
signed. FAs are usually signed in a ceremony be signed. Before the signing ceremony, LEG
at IFAD headquarters, but may also be signed verifies with FMD that neither of these events
elsewhere or separately by both parties. has occurred.
48. The LtB/R is signed by the President and, if 50. If the FA is not signed within two years of
possible, provided to the B/R at the ceremony. approval of financing by the Executive Board,
the approval will be automatically cancelled15
unless the Board grants an additional period.

14 The contingencies associated with each expenditure type are normally placed in the ‘unallocated’ category.
15 Document EB 92/45/R.8.

52
E.15 Financing of taxes
51. In accordance with GC section 11.01, both IFAD 54. If the financing cannot be used to pay taxes,
financing and loan service payments (principal, this must be reflected in the far-right column
interest and service charges on loans) are exempt of the table in schedule 2, which can either
from all taxes. Similarly, FAs are exempt from state that amounts are ‘net of taxes’, or can
any taxes on signature, delivery or registration. specify a percentage of eligible expenditures to
This means that the B/R may not, for example, be financed that reflects the overall estimated
charge a tax on the financing itself, or impose tax applicable to a particular category or
a tax on registration of the agreement – taking categories. For example, if the estimates for
money ‘off the top’ of the financing. the project show that 25 per cent of projected
costs will be taxes, this column would provide
52. The General Conditions were amended in 2009
that only 75 per cent of eligible expenditures
to allow the proceeds of IFAD’s financing to
will be financed by the IFAD financing. In
be used to finance taxes that are not “excessive,
such a case, the financing could be used to pay
discriminatory or otherwise unreasonable”
costs that include taxes, but overall use of the
(section 11.01(c)). For projects approved after
IFAD financing would be capped in a way that
April 2014, payment of taxes is permitted
requires the B/R to bear the overall burden of
provided that: (a) the B/R has informed IFAD
taxes on the project.
in writing that it is impossible or impractical
to exempt the project from all or certain taxes; 55. Often the commitment of the B/R to provide
and (b) the World Bank’s Country Financing counterpart funds (see section E.9 above) is
Parameters would permit the financing of such simply a commitment to finance taxes paid by
taxes for a similar project. the project. In other cases, the B/R may exempt
donor-financed projects from taxes, and the
53. When financing of taxes is permitted under the
counterpart contribution is the nominal value
criteria set out above, an assessment will be
of this exemption. In either case, the B/R’s
made in the project design phase taking into
commitment should be set out in section B of
account: (a) prior experience in the country
the FA.
and country FM performance; (b) whether taxes
and duties constitute an excessively high share 56. Taxes that are “excessive, discriminatory or
of project costs and are material; and (c) the otherwise unreasonable” are not eligible for
government contribution to other costs, such financing (GC section 11.01(c)). In general, taxes
as recurrent costs. Whenever possible, taxes and are presumed to be reasonable unless the World
duties on imported goods will be excluded, Bank’s Country Financing Parameters indicate
based on the assumption that these taxes are otherwise. If particular types of taxes are not
easily identifiable and can be exempted in most eligible for financing for this reason, that fact
countries. The decision on financing of taxes should be reflected in schedule 2. If new taxes
will be made jointly by the CPM and FO. The are assessed that were not foreseen in the design
rationale for allowing the financing of taxes process, the CPM and FO, taking into account
must be included in the President’s report the World Bank parameters and other relevant
submitted to the Executive Board. For projects factors, will determine whether they will be
approved prior to 30 April 2014, an amendment eligible.
to the FA may be processed in accordance with
57. Nature of taxes. Taxes paid by the ultimate
standard operational procedures if deemed
recipient of an expenditure (e.g. income taxes
appropriate. However, this may require a
paid by a project employee or taxes on the
corresponding reduction in the scope of the
profits of a contractor) are not considered taxes
project.
paid by the project. If payment of taxes has

Module A
E 53
not been approved (see paragraph 51), IFAD from the paying party, for onward remittance
funding cannot be used for indirect taxes such as to the tax authorities. Withholding tax is not
the goods and services (GST) or value added tax another type of tax, but a mode of tax payment.
(VAT). These should always be deducted from As long as withholding tax can be seen as an
the invoice and paid from government sources. advance income tax under national legislation,
The situation is similar for a withholding tax, as it is not considered a tax and can be paid from
this refers to the deduction of tax at source from IFAD project financing.
payments (income) due to a receiving party,

E.16 Letter to the borrower/recipient


58. Scope and authority. The General Conditions the financing (‘disbursement instructions’)
give IFAD unilateral power to impart and financial accountability and auditing
certain instructions to the B/R on matters arrangements for each project. It also specifies
related to implementation of the project procurement methods and applicable prior
and administration of the financing.16 For review thresholds.
example, GC section 4.04(a) provides, “When
61. The LtB/R is signed by the President of
the Borrower/Recipient wishes to request
IFAD (named in the FA as the ‘authorized
a withdrawal from the Loan and/or Grant
representative’ of the Fund). In addition, it
Accounts or a Special Commitment, the
delegates authority from the President to
Borrower/Recipient shall deliver to the Fund
the divisional director, CPM, Director, FMD,
an application in the form specified therefor by
and FO for supervision of the project and
the Fund, together with such documents and
administration of the financing.
other evidence in support of such application
as the Fund shall reasonably request.” The 62. The current model LtB/R is set out in exhibit E-6
“form specified therefor by the Fund” and the Letter to the borrower/recipient (LtB/R), together
degree of documentation required to show with exhibit E-7 Revisions to the LtB/R. Further
that expenditures have been made are matters procedural guidance for its preparation is
entirely up to IFAD to determine (provided, provided in this module. A final draft should
of course, that IFAD’s requirements are be tabled at negotiations for the information
‘reasonable’). of the B/R, and its contents explained during
negotiations. The LtB/R requires clearance by
59. For this reason, certain forms are attached to
the CPM, LEG and SEC prior to submission for
the LtB/R, together with the Loan Disbursement
signature by the President (or his designee) in
Handbook for IFAD Directly Supervised Projects
preparation for the signing ceremony. Revisions
(LDH), in which procedures and forms to be
to the LTB/R, unless pertaining to updates that
used by the B/R for the withdrawal of financing
support an approved additional financing, do
proceeds are specified – these are the “form
not require LEG clearance.
specified therefor by the Fund, together with
such documents and other evidence in support 63. The first LtB/R for any project is normally signed
of such application” mentioned in GC section by the President simultaneously with the FA.
4.04(a). In accordance with this provision, The LtB/R is mandatory for investment loans,
the B/R is legally obligated to follow the DSF grants and component grants funded from
instructions set out in the LtB/R, the LDH and IFAD or other external resources.
any subsequent modifications of these sent by 64. Content. The following project-specific details
an authorized official of IFAD. are usually specified in the LtB/R:
60. FMD staff finalize a detailed draft LtB/R before (a) Requirement of a DA to receive financing
or during negotiations. This letter provides proceeds (GC section 4.04(d));
instructions to the B/R for withdrawal of

16 Whenever the FA or General Conditions provide that the Fund ‘shall notify’ or ‘may require’, etc., it means that IFAD has
the legal authority to make a unilateral decision concerning the matter. Obviously, in most cases such decisions will have been
discussed with the B/R beforehand, but the power to make the decision rests with IFAD alone.
54
(b) Ceilings for the authorized allocation 68. Supporting documents requested should include
(where applicable); accounting evidence that is normally required
under generally accepted accounting practices.
(c) Project accounts to be maintained (where
Examples of such evidence include: copies of
applicable);
invoices, receipts from contractors, contracts/
(d) Counterpart funding (GC section 7.03); agreements when applicable, and documentary
(e) Applicable SOE thresholds; evidence of delivery and acceptance of
contracted goods, works or services. For unusual
(f) Start-up costs and retroactive financing expenditure categories (e.g. equity financing,
(where applicable); guarantee funds.), if additional information or
(g) Prior review; supporting documents are considered important
in establishing the eligibility and end use of
(h) Methods and thresholds for procurement funds, these should be specifically stated.
by differing expenditure types; and
69. Banking arrangements should be clearly stated,
(i) Financial reporting requirements and for both designated and project accounts. If
deadlines for the appointment of auditors. pooling of the DA is envisaged, this should
65. If multiple sources of financing administered be specified. The section on project accounts
by IFAD apply (e.g. DSF grant, ASAP), each is intended to assist the project regarding:
financing should be stated separately, both in (a) awareness that counterpart funds will be
the subject matter and within the text, with the deposited/provided efficiently and promptly to
corresponding loan/grant number, dates and the project; (b) transfer of financial resources
amounts. Any special conditions applicable to to project account(s) and how they should be
such other financing should be addressed in the managed; and (c) information regarding the
appropriate LtB/R paragraphs. deposit of financial resources by cofinancier(s)/
beneficiaries. The section on ‘maintenance
66. The letter should be addressed to the authorized
of a separate project account for counterpart
representative of the B/R indicated in section E
funds’ will only be inserted if the counterpart
of the FA, at the address specified in the
contribution is also in cash.
agreement. Where customized SOE formats are
to be used for projects, the appropriate forms 70. Thresholds for IFAD’s prior review of
are to be attached, as provided in annex 2 of procurement activities, as well as methods of
the LtB/R (see exhibit E-6 Letter to the borrower/ procurement, are to be provided by the CPM
recipient (LtB/R)). and described in the LTB.

67. The SOE thresholds stated in the LtB/R will be 71. Instructions should be provided for
determined based on the project expenditure specific accounting and financial reporting
profile and FMA conducted during design. requirements, such as accounting standards
For low-risk projects, no SOE thresholds to be used, inclusion of start-up costs and
should usually be specified, implying that no retroactive financing, if applicable, and
supporting documents need be submitted consolidation of subproject agencies. If FM
ex ante with the WAs. For medium-risk capacity is expected to be in place (including
projects, SOE thresholds may be eliminated or accounting software and staff capacity), the
determined at the discretion of the FO. However, requirement for interim financial reports (IFRs)
in all such medium-risk cases, the LtB/R should is to be inserted. The time period for which IFRs
seek to obtain supporting documents for a should be submitted and their deadlines are
sample of transactions to validate them before to be modified as applicable. Where necessary,
approving disbursement. For high-risk projects, customized audit TORs that have not yet been
thresholds are determined at the discretion of discussed during design should be attached.
the FO. SOE thresholds may be determined 72. The LTB/R should normally specify whether the
for some or all expenditure categories, taking audit will be performed by the SAI or a private-
into account the underlying fiduciary risks and sector auditor acceptable to the Fund.
relative proportion of amounts allocated to
these categories.

Module A
E 55
CHANGES DURING IMPLEMENTATION
MODULE F
Module F
Changes during implementation
• Changes and amendments to the financing agreement
• Category reallocation
• Extension of the project completion date
• Force majeure
• Dealing with de facto governments

58
F.1 Changes and amendments to
the financing agreement
1. The FA and General Conditions give IFAD the 3. Amendments may include changes to the
authority to make the following unilateral allocation table that introduce a new category,
changes without the need for a countersigned a change in a category description, deletion of
amendment: a category or an adjustment to a disbursement
percentage for reasons other than those
(a) Postponement of the project
described in GC section 4.07(c)(ii).
completion and financing closing dates
(GC section 2.01); 4. All amendments require a request from or the
agreement of the B/R’s authorized representative
(b) Reallocation of proceeds among categories
prior to processing. A memorandum is prepared
in accordance with GC section 4.07;
proposing the amendment, following review by
(c) Reduction of percentages in accordance the CPMT and clearance of the memo by LEG
with GC section 4.07(c)(ii). and FMD, and subsequently sent, for approval
2. Amendments. Most amendments to FAs require by the AVP, PMD. Once the amendment is
approval by the AVP, PMD, with the exception approved by that AVP, LEG prepares a letter
of those significantly changing the scope or of amendment to be signed by the regional
characteristics of the financing or the project divisional director after clearance by the CPM
originally approved by the Executive Board. and FMD. The amendment usually enters into
LEG, in consultation with the CPM and FMD, force on countersigning as of the date of the
will determine if an amendment significantly amendment letter.
changes these aspects. In such cases, the
amendment must be presented to the Board
for approval.

F.2 Category reallocation


5. GC section 4.07(b) requires IFAD to monitor 7. In normal practice, the CPM first reviews the
the level of use of the financing proceeds progress and projections of individual project
allocated to each category. components with the B/R to determine how
funds may need to be reallocated. Proposals for
6. As mentioned above, PMD and FMD must
a reallocation usually involve:
continuously monitor use of the financing to
determine if and when the amount allocated (a) Transfer of unallocated funds to one or
to an expenditure category has been depleted more of the other categories; or
or is about to be depleted. In accordance with
(b) Transfer of the anticipated savings in one
GC section 4.07(c), if IFAD determines that the
category to another category or categories
allocation to a particular category is insufficient,
for which the requirements are greater than
it may, by notice to the B/R, reallocate funds
were estimated in the design phase.
from one category to another. This allows
reallocations to be made expeditiously. Where
the reallocation would not meet the expected
shortfall, IFAD may decide to reduce the
percentage of expenditures to be financed from
the financing.

Module A
F 59
8. Following the above review, the CPM discusses ensure that the proposed reallocated amounts
the proposal with the FO before notifying the for these categories do not result in a sizeable
B/R of the proposed revised allocations for and unreasonable percentage of the total
individual categories. Reallocation proposals financing amount. Reallocations should not
must include a table providing information result in allocations to recurrent costs (salaries
for each expenditure category on amounts and operating costs) in excess of 30 per cent of
authorized, already withdrawn, amounts total project costs. Any reallocation to recurrent
reserved to cover SCs, if any, and anticipated costs exceeding 30 per cent of total financing
future expenditures. To avoid category overdrafts must be approved by the Director, FMD, on
after reallocation approval, the table must also recommendation by the CPMT.
show WAs submitted, but not yet processed in
10. The resulting shifts in categories must not
the FXC by ACD or TRE, as well as any need for
impair the overall financial and physical
a further reallocation.
balance of the project. Once approved by IFAD,
9. The proposal for a reallocation must include the regional division notifies the B/R of the
a detailed explanation of the reasons, which amendment by fax or e-mail.
should be agreed with the B/R, either based
11. A need for changes may emerge, such as the
on an official request or clearly documented
deletion or modification of an existing category
in a mission aide-memoire. Transfers from
or the creation of a new category. These
unallocated funds require the clearance of the
could be identified in an MTR or other major
FO and approval by the regional divisional
review of project implementation, including a
director. Transfers among existing categories
detailed assessment of the project component
require the clearance of the FO and LEG and
costs associated with each of the expenditure
are approved by the AVP, PMD. In considering
categories. Such changes in the category
such proposals, attention should be paid to
structure usually require amendment of the FA.
recurrent cost categories such as ‘operating
costs’ and ‘salaries and allowances’, so as to

F.3 Extension of the project


completion date
12. The timely closing of projects is an essential (b) The project remains viable and the
part of efficient implementation and portfolio extension is likely to lead to the successful
management. IFAD projects are expected to achievement of project objectives.
close on time.1 The B/R is responsible for
15. The project completion date may not be
ensuring that project parties complete all project
extended if any of the following problems have
activities and that all eligible expenditures are
occurred and are continuing to occur at the time
incurred by the project completion date.
the extension is requested:
13. The completion date may only be extended in
(a) Project objectives have not been achieved
exceptional circumstances and in compliance
due to an overoptimistic design.
with the following procedures on receipt of the
B/R’s request or consent. (b) An extension has already been granted, and
the plan of action that was to have been
14. It can be extended only if all following
completed during the previous extension
conditions have been met at the time the
period has not been completed.
extension is requested:
(c) The B/R is in material non-compliance
(a) The CPM and B/R (and CI, if applicable)
with the FA, or the financing is under total
have made a concerted effort to address any
suspension.
issues affecting project performance.

1 President’s Bulletin PB 99/01.

60
16. The completion date may not normally be (c) An action plan for project implementation
extended beyond three years, except in cases during the extension period, including the
in which an extension is sought to reactivate targets for physical progress, a schedule of
a project after a period of force majeure. further disbursements and an indication
Extensions of more than three years must be that either the full amount of the
approved by the President. undisbursed sums will be required or an
estimation will be made of the amount of a
17. It may not be extended solely for the purpose
partial cancellation; and
of using unspent balances in the loan/grant
accounts, whether these are due to a devaluation (d) An estimate of additional costs to be
of local currency or other causes. incurred.

18. The project completion date may be extended 21. Requests for extension of the project completion
with respect to certain project components or date are made through a memorandum setting
activities. In these cases, any undisbursed loan out all material facts in favour of the extension
amounts allocated for categories not relevant to in detail, as provided through the regional
such components or activities will be cancelled director, following review by the CPMT, for
or reallocated. approval by the AVP, PMD. If the B/R initiated
the proposed extension, its request should be
19. If a B/R requests an extension, or if the
attached. Otherwise, written acceptance by the
CPM determines that an extension might
B/R of the proposed extension should generally
be necessary, the CPM carefully reviews
be obtained and attached to the memo. Where
the progress of project implementation. In
requests for extension of the project completion
reviewing a request for extension, the CPM must
date extend beyond three years from the original
undertake an assessment of:
completion date, the President’s approval is
(a) Factors causing the delay in project required.
implementation;
22. If the extension request is approved by the AVP,
(b) Additional time needed to complete project PMD, a fax is sent by the regional divisional
implementation, consolidate project director to inform the B/R of the new project
achievements, finalize disbursements or completion date and financing closing date and
draw up a schedule for further withdrawals; any other relevant matters (e.g. in the case of a
and partial extension as provided above). LEG, FMD
(c) Any special action called for on the part of and ACD should also be notified on approval
the B/R, LPA or IFAD to make it possible to of the new project completion date. The B/R
meet the extended project completion date. must also be notified promptly if its request
for extension has been denied. An extension
20. All requests for extensions should specify: of the completion date results in an automatic
(a) The period for which the extension is extension of the financing closing date for an
sought; equal period.

(b) In the case of partial extensions, the


activities or components with respect
to which the extension is sought and, if
applicable, any related reallocations or
cancellations;

Module A
F 61
F.4 Force majeure
23. A period of force majeure is one in which (b) A decision that a period of force majeure
project implementation must be suspended due exists will result in suspension of
to civil war, severe political unrest or similar disbursements, subject to certain exceptions
circumstances. Force majeure can apply to all (see module H, section H.10).
projects in a Member State, or only to one or
(c) If the AVP, PMD, determines that the
more of them. The AVP, PMD, has authority to
period of force majeure has ended,
determine that a period of force majeure is in
implementation of the project may resume.
effect or has ended – in either case, on the basis
The decision to resume implementation
of a memo from the CPM through the regional
should include a determination as to
divisional director, duly cleared by LEG and the
whether the project completion date
Director, FMD.
should be extended.
24. Special procedures for force majeure periods:
(d) At any time during a period of force
(a) If the project completion date occurs majeure it may be determined that “…
during a force majeure period, it is a situation has arisen which may make
indefinitely postponed, for a period not it improbable that the Project can be
normally exceeding three years, unless successfully carried out …” (GC section
otherwise decided by the AVP, PMD. 12.01(a)(vi)), which would justify
Extension beyond three years must be cancellation.
approved by the President.

F.5 Dealing with de facto governments


25. In September 2010, the Executive Board 27. The regional divisional director is responsible
adopted the Guidelines on Dealing with De for communicating with the de facto
Facto Governments. government and for verifying that this
government is in effective control of the country,
26. With regard to the ongoing country portfolio of
able to continue project implementation and
projects in a Member State whose government
prepared to honour the commitments made
changes without an orderly transition of power,
in individual FAs, including loan repayment
it is necessary to reconfirm the commitment of
obligations.
the de facto government to the undertakings
of the previous government before continuing
IFAD’s financing operations.

62
PROJECT SUPERVISION AND FINANCIAL
MANAGEMENT MODULE G
Module G
Project supervision and financial management
• Project start-up
• Project supervision
• Direct supervision
• Supervision by cooperating institutions
• Role of country presence and country teams
• Procedures for FM supervision
• Financial management support
• Interim financial reports
• Accounting and reporting standards
• Financing closure
• Loans and Grants System and tools

64
Project Supervision and Financial Management

1. Implementation of the project is the sole ‘Financial administration’ is defined as the


responsibility of the B/R. IFAD’s role is limited part of the supervision process that deals with
to supervision of project implementation issues of disbursement and flow of funds,
and administration of the financing. In some compliance with loan covenants, administrative
cases, however, supervision and/or loan management and FM aspects of implementation
administration are entrusted to a CI. such as budgeting and accounting, treasury
management, financial planning, internal
2. Responsibility for actual implementation of
controls, financial reporting and audit
project activities lies with the B/R (through
compliance. It involves identifying/anticipating
the designated LPA) and the project parties.
FM constraints and proposing appropriate
IFAD has a responsibility to ensure that project
measures to overcome issues and risks. This
implementation is efficient and that objectives
module provides detailed procedures on FM
related to project results, expected impact and
and loan administration requirements during
sustainability are achieved. This responsibility is
project supervision.
carried out by IFAD through project supervision
(including loan administration and FM) and 4. Implementation support encompasses all
implementation support. actions taken by IFAD to assist the B/R in
achieving the project’s development objectives.
3. The Agreement Establishing IFAD (article
This support is often delivered as a follow-up
7, section 2(g)) defines ‘supervision’ as the
to supervision missions and may take the form
“… administration of loans, for the purposes
of specific problem-solving or of training in
of the disbursement of the proceeds of the loan
implementation strategy, AWP/B preparation
and the supervision of the implementation of
and execution, technical issues, the M&E system,
the project or programme concerned ….”
reporting tools, the FM system, procurement
The objectives of project supervision are to:
and other financial issues.
(a) Assess the progress of project
implementation;
(b)  Identify/anticipate problems or constraints
in implementation; and
(c) Propose solutions or corrective measures
for improvement.

Module
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A 65
G.1 Project start-up
5. The B/R normally organizes a start-up workshop 7. The content of this ‘hands-on’ training
during which the project is officially launched. session includes: operation of the designated
It is attended by representatives of IFAD, the B/R and project accounts, IFAD disbursement
and beneficiaries, staff of the LPA, implementing procedures, preparation of WAs (including
agencies and the various project stakeholders. the SOE mechanism), preparation of the
The objective is to reach a clear common AWP/B and procurement plan, conduct and
understanding of the legal and financial monitoring of procurement activities, periodic
conditions of project objectives and expected financial reporting and preparation of financial
results, and the roles and responsibilities of each statements, and elaboration of M&E system
party. The workshop also serves to clarify IFAD requirements. The General Conditions, FA,
requirements and procedures relating to AWP/B LtB/R, IFAD Guidelines on Project Audits, IFAD
preparation, procurement, disbursements, Procurement Handbook and PIM all serve as
counterpart funding, FM, M&E systems and support material for this practical training.
reporting. In the event this training session cannot be
conducted as part of the start-up mission, it
6. In addition to the CPM, the FO and/or subject
should be organized shortly thereafter to avoid
matter specialists may participate in the start-up
a lack of the necessary tools for the project team
workshop to train project implementation staff.
to perform their work satisfactorily.

G.2 Project supervision


8. IFAD project supervision is an ongoing (iii) Assist the LPA in improving technical
process that can be depicted as an annual cycle and financial execution so as to reach
comprising four key steps: AWP/B and overall project objectives;
and
(a) Supervision planning. The CPM prepares
an annual supervision plan outlining the (iv) Build the capacity of the LPA and
main supervision and implementation other project parties in various aspects
support activities to be conducted during of project management. 
the project year (including MTR and
(d) In addition, the CPM organizes a follow-up
project completion reviews), as well as the
mission whenever the previous supervision
corresponding budget.
mission has identified a need to provide
(b) AWP/B and progress report review. The implementation support on specific issues
CPM approves the AWP/B and reviews and/or to resolve outstanding issues.
the periodic progress reports prepared
(e) Financial management. Financial
by the LPA, which are the main tools for
management staff and workforce (FOs
monitoring implementation progress. A
and/or FMSs) participate in supervision
copy of the approved AWP/B should be
missions to review the continuing
copied to FOs for information.
adequacy of FM arrangements and loan
(c) Supervision missions. Normally led by the administration, update fiduciary risk
CPM (or the CI), supervision missions are assessments and agree on actions needed to
organized to: mitigate these risks.
(i) Review implementation progress in
the field;
(ii) Review financial aspects of the project;

66
9. IFAD policies and procedures relating to (b) Guidelines: Supervision and
supervision are set out in the following: Implementation Support of Projects and
Programmes Funded from IFAD Loans and
(a) IFAD Policy on Supervision and
Grants (September 2007) (‘supervision
Implementation Support (December 2006)
guidelines’) (www.ifad.org/operations/
(‘supervision policy’) (www.ifad.org/
projects/supervision/guidelines.pdf).
gbdocs/eb/89/e/EB-2006-89-R-4-REV-1.
pdf);

G.3 Direct supervision


10. The CPM has overall responsibility for the (a) Assessment of the implementation progress
entire project supervision process, under the of each project component against the
supervision of the divisional director. Other AWP/B and overall project objectives
parties involved may include: (including field visits to verify reported
physical progress);
(a) The portfolio adviser and team, who provide
direct support to the CPM in the discharge (b) Discussions with beneficiaries regarding
of country programme management their perception of project performance;
responsibilities;
(c) Critical review of the M&E system and the
(b) The FO, who works closely with the CPM, quality of project reporting;
may directly participate in supervision
(d) Identification of problems or constraints
missions if considered necessary by
in the technical, targeting, M&E or any
FMD; otherwise, a suitably qualified,
other aspect of project implementation and
accredited mission FMS with the required
consideration of the need to amend project
qualifications and experience will be
documents such as the logical framework
deputed to participate on behalf of FMD, in
or AWP/B;
accordance with published procedures1 and
with TORs cleared by the FO. (e) Agreement on remedial actions to remove
constraints and resolve problems identified
(c) The LEG Operations Unit, which provides
during the mission.
advice on issues relating to the FA or any
other issues having legal implications; 12. Implementation of the project is carried out
in accordance with the AWP/B – an important
(d) LPA staff, who assist in the planning and
document that allows IFAD to monitor project
organization of supervision missions, and
activity progress and control actual use of the
are the main contacts for the supervision
financing.
mission team;
13. GC section 2.01 defines the ‘AWP/B’ as “the
(e) The CPMT, whose IFAD and in-country
annual workplan and budget for carrying
components participate in various activities
out a Project during a particular Project
related to project implementation.
Year, which includes the Procurement Plan.”
11. The CPM is responsible for organizing, leading The ‘procurement plan’ is presented as “the
and reporting on the supervision mission, and Borrower/Recipient’s Procurement Plan covering
also for ensuring that the necessary follow-up the initial eighteen (18) month period of
actions are taken. The specific tasks undertaken Project implementation, as the same shall be
as part of the supervision mission relate to both updated to cover succeeding twelve (12) month
programmatic/technical and financial aspects periods.”
of project execution. The programmatic review
typically focuses on the following:

1 See Information Circular IC/FOD-PMD/01/2012.


2 ‘Acceptance’ can also be characterized as non-objection.

Module
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A 67
14. GC section 7.01(b) sets out procedures for (e) Verification of: SOEs (on a sample basis);
preparation and approval of the AWP/B. The WAs against supporting documents and
LPA prepares the draft AWP/B and submits it accounting evidence to confirm their
to IFAD for comments, review and acceptance.2 eligibility for financing; and reconciliations
This means that IFAD must agree to the B/R’s of the banking accounts, including the DA;
plans for implementation of the project, the
(f) Assessment of the adequacy of financial
procurement plan, and the proposed sources
accounting systems for recording and
and uses of funds. As is the case with the
reporting project transactions and of
AWP/B, overseeing the procurement plan and
administrative systems (personnel and
monitoring contract execution related to project
assets management);
procurement is the responsibility of PMD.
(g) Review of the internal audit report to
15. GC section 7.05(a) provides, “Each Procurement
confirm if its scope is adequate and if its
Plan shall identify procedures which must
findings indicate significant weaknesses
be implemented by the Borrower/Recipient
in internal controls that have not been
in order to ensure consistency with the IFAD
addressed; verification of a sample of
Procurement Guidelines.” This means that the
transactions to determine if internal
procurement plan must specify procurement
controls to confirm eligibility of
methods and applicable thresholds, as well as
expenditures and financial accountability
thresholds for prior review by IFAD.
have operated satisfactorily and are in
16. Acceptance/non-objection of the AWP/B and compliance with the PIM;
procurement plan are the responsibility of
(h) Verification of compliance with the FA with
PMD, as are all decisions related to the review
respect to fiduciary covenants;
of procurement documents and prior review of
proposed procurement, in consultation with (i) Identification of problems or constraints
LEG and FMD, where appropriate. in the flow of funds to intended
end beneficiaries and financial and
17. The approval of the AWP/B is the one condition
administrative management aspects;
that must be adhered to prior to any withdrawal
of loan/grant funds from the loan/grant account (j) Follow-up on external audit review
(see GC section 4.02(b)), with the exception of findings, recommendations and
retroactive financing and start-up costs. outstanding issues;

18. The financial review undertaken by the FO or (k) Agreement on remedial actions to remove
FMS normally includes the following tasks: constraints and resolve problems identified;

(a) Confirmation that accounting staff with (l) Confirmation of the risk rating or an
the required qualifications and experience explanatory note in the case of a change in
continue to be available to the project; risk rating following the mission.

(b) Review of project expenditures against the 19. At the end of the supervision mission, findings
AWP/B to ensure sufficiency of funds in the are summarized in an aide-memoire, followed
various expenditure categories and project by a management letter sent from the CPM
components; identification of potential to the authorized representative of the B/R.
cost overruns or savings; The supervision guidelines provide detailed
guidance for these reports. The section dealing
(c) Analysis of the financial execution of
with financial aspects of the supervision mission
the AWP/B and review of the budget
should include precise information on the
monitoring system; assessment that the
nature and extent of the review procedures
reported financial progress is broadly
carried out (number and percentage of WAs
consistent with progress reports prepared
tested, basis for selection of sample, test
by project management;
results, etc.), as well as an update on the
(d) Analysis of financial commitments implementation status of previous supervision
and disbursements against a sample of mission and audit recommendations.
approved contracts; Procedures for the scope of FM supervision
are defined in Information Circular IC/FOD-
PMD/01/2012.
68
G.4 Supervision by
cooperating institutions
20. A small number of IFAD-funded projects is expected to administer IFAD loans and
provide for appointment of a CI to administer supervise implementation of IFAD projects
the loan and supervise project implementation. with the same care and diligence it applies to
The framework for appointment of the CI its own operations and in accordance with its
is formally documented in a cooperation own operating procedures. FMD staff must
agreement and supplemented for each project nevertheless maintain contact with the FM staff
by a letter of appointment that spells out the of the CI and ensure that they (FMD) regularly
effective date of the appointment and specific receive copies of audits and supervision reports
CI responsibilities with respect to individual of missions conducted by the CI, and are
projects. aware of obligations on key dates such as the
completion and closing dates.
21. GC section 3.02 defines the responsibilities of a
CI as follows: 23. With regard to procurement, in cases where
the CI also provides cofinancing, the FA may
(a) facilitating Project implementation by
stipulate that the CI’s procurement rules shall
assisting the Borrower/Recipient and
apply. This arrangement prevents any conflict
the Project Parties in interpreting and
due to a variance in the eligibility criteria and
complying with the Financing Agreement;
procurement practices generally followed by
(b) reviewing the Borrower/Recipient’s the two institutions. If no such cofinancing
withdrawal applications to determine the arrangements exist, the applicable policies and
amounts which the Borrower/Recipient is procedures are agreed with the B/R and specified
entitled to withdraw from the Loan and/or in the FA and other relevant documents.
Grant Account;
24. PMD acts as the focal point for relations
(c) reviewing and approving on a no-objection with CIs. It organizes periodic meetings and
basis the procurement of goods, civil works monitors the orientation, frequency, quality,
and services for the Project financed by the reporting and cost of the supervision activities
Financing; of these institutions. ACD carries out financing
(d) monitoring compliance with the Financing administration and provides support where
Agreement, bringing any substantial non- required, while FMD is responsible for
compliance to the attention of the Fund performing audit reviews and for other FM
and recommending remedies therefor; and matters. As IFAD’s corporate IT systems develop
over time, it is expected that projects and
(e) carrying out such other functions to B/Rs will be able to access their individual data
administer the Financing and supervise directly.
the Project as may be set forth in the
Cooperation Agreement.
22. GC section 3.04 provides that any action
taken by the CI in connection with these
responsibilities shall be regarded as an action
taken by IFAD. The CI normally administers
the loan in accordance with its own procedures,
as agreed between IFAD and the CI. The CI

Module
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G.5 Role of country presence
and country teams
25. IFAD country offices operate with the support
of the regional portfolio adviser, the FO, LEG
assigned to the country and, more generally,
the CPMT.

G.6 Procedures for FM supervision


26. Financial management includes two interrelated (a) Desk review of relevant documents.
processes: Analytical review of periodic progress and
audit reports should be conducted as soon
(a) The FM review conducted in-country as part
as possible after the relevant information is
of supervision or implementation support
received. Key documents to be reviewed are:
missions, usually once or twice a year;
(i) Project progress reports. These allow
(b) Financial progress monitoring, which is a
FMD staff to obtain a snapshot of
continuous process throughout the life of
the financial performance of the
the project.
project. The staff member should,
27. The following paragraphs provide the to the extent possible, focus his/
methodology for monitoring the FM her work on: analytical reviews that
performance of a project, understanding permit an overall view of the project
fiduciary risks and tracking financial activity and its financial progress; review of
during implementation. disbursement requests; comparison of
28. These procedures should be seen as a tool to actual disbursement with the planned
facilitate the work of the FMD staff member and annual schedule of expenditure; and
help him/her make decisions when assisting comparison of the overall forecast
CPMs/FOs in monitoring the financial aspects financial outcome with the approved
of projects. They do not, however, seek to be budget and funding envelope.
overly prescriptive and so do not replace the (ii) Annual external audit reports on the
application of professional judgement by FMD project financial statements. These,
staff and the FO. including specifically the ‘management
29. Financial management. Monitoring of FM letter’, will provide information on any
during implementation should be seen as a fiduciary risk aspects of the project.
continuous process and should cover both: In undertaking the reviews, FMD
staff should specifically consider the
(a) FM arrangements, to ensure that those in timeliness of receipt of the AFSs and
place continue as planned throughout the whether or not the content of these
project; and statements indicates any significant
(b) Financial performance assessment as fiduciary risk issues. Delays in
planned, in terms of both budget and submission of audit reports – beyond
timescale. IFAD project audit policy and the
time agreed with borrowers – would
30. FM activities during supervision should adhere
normally warrant remedial actions
to best practices adopted by IFAD within the
under the IFAD Guidelines on Project
overall corporate fiduciary framework. Thus it is
Audits.
necessary to review both financial performance
to date and the continuing adequacy of FM
arrangements by a combination of:

70
FMD staff should also consider and/or LPA should be notified of
whether the quality of the audit report any actions they should take and/or
and supplementary documentation actions to be taken by IFAD.
is of an acceptable standard and, if (iii) A ‘force account’ occurs when the
not, should discuss concerns with the implementing agency uses its own
CPM to decide actions to be taken, work force, equipment and other
including whether or not the external resources to carry out civil works
auditor continues to be acceptable (also known as ‘direct labour’,
for the purposes of IFAD-financed ‘departmental force’ or ‘direct work’).
operations. The FMD staff member should
Any issues arising from a routine, ascertain that force account staff have
stand-alone desk review of project provided construction or maintenance
progress reports or AFSs should work or other services at a reasonable
be formally communicated to cost and that periodic certification of
the borrower/project, usually progress and completion of works in
electronically. support of WAs have been submitted.

Exhibit G-5 lists other documentation 31. Timing of combined desk and site-visit
and information that may be relevant reviews. Supervision through site visits provides
and useful. greater reliability than desk reviews, as the
FMD staff member obtains first-hand evidence
(b) Site visits to project locations to meet
of funds reaching intended beneficiaries,
with the implementing entity and PIU
expenditures being incurred and paid-for
staff to review the performance of the FM
outputs being realized, without any filters
system and verify a sample of controls and
that may reduce impact or reliability. Thus
individual disbursement transactions:
these visits are a fundamental part of ongoing
(i) Site review activity will consist of financial due diligence. Where physical outputs
periodic visits by the FMD staff paid for by IFAD financing are realized, projects
member, usually as part of scheduled should be encouraged to transparently and
project supervision missions. S/he will publicly display on-site information on these
check that FM arrangements in place outputs.
at the beginning of the project are still
32. Combined desk and site-visit reviews should be
operative and that there is no new or
undertaken on a predetermined schedule. The
changed exposure to risk.
timing and frequency should be recommended
(ii) During project implementation, the by the FO in the light of underlying risks and
FMD staff member should periodically agreed with the CPM. Typically, these will be
review the continuing adequacy of semi-annual, but could be less frequent for
FM arrangements, undertaking, as FMD staff if the results of the initial review, or
necessary, visits to project locations of subsequent reviews, are satisfactory. However,
to meet with borrower and/or LPA the frequency of on-site reviews by FMD staff
FM staff. S/he should also verify a should revert back to at least semi-annual if an
sample of controls and individual annual review or audit report reveals material
disbursement transactions. Any adverse issues. The FMD staff member should
changes to the FM arrangements structure his/her work and summarize findings
must be documented in the form of a and conclusions according to the guidance
brief report and reflected in the aide- given in this document.
memoire and/or supervision report.
33. Monitoring project financial progress and
The staff member, in consultation with
performance. Ongoing financial performance
the CPM, should take prompt action
should be periodically reviewed to check that
to minimize the new risk, as outlined
implementation is proceeding within budget
above in the case of adverse external
and is in line with initial estimates of the
audit findings. Again, the borrower
phased expenditure profile. This task should

Module
Module G
A 71
be completed either by the CPM or FO through planned and that fiduciary risk issues
desk review of periodic progress reports. As should be addressed.
a minimum, FM inputs into project progress
37. In the latter case, the report should indicate
reports must include:
actions recommended to re-establish and/
(a) A statement showing actual cash receipts or maintain satisfactory FM arrangements.
and payments for the period (year-to-date) Similarly, FMD staff should report any
and cumulatively (project life) by main deficiencies identified in the FM arrangements,
income and expenditure classifications; and including unsatisfactory arrangements in the
implementing entity, ineligible expenditure,
(b) Beginning and ending imprest account
failure to submit audited financial reports
balances.
promptly, or audit findings indicative of
34. Any significant inconsistency (e.g. overbudget or internal control weaknesses. FMD staff should
underbudget expenditures) must be brought to discuss these matters with the borrower and/
the attention of the B/R to discuss implications or implementing entity at the end of the site
and agree on remedial action. visit, after consultation with the FO/CPM. The
35. Results of FM during implementation. The borrower and/or implementing entity should
FMD FO will document the results of findings subsequently be notified by the CPM or FO of
related to FM during implementation and, in any specific actions to be taken by IFAD.
consultation with the CPM, update project 38. When the FO is unable to join a mission,
performance ratings (in project status reports project-level assessment should be carried out by
[PSRs]) and FM risk ratings, as appropriate. a qualified, experienced FMS. Key tasks of FMD
36. Reporting findings and conclusions. The FMD staff include a review of fiduciary aspects of the
staff member should document the results of project, including the existence and effectiveness
a site-visit review in a brief report describing of the originally agreed FM arrangements (see
the type of inspection performed and the work exhibit G-4 Sample Consultant TORs).
completed (i.e. the walk-throughs and/or test 39. The FO (or FMS) assigned to the supervision
checks undertaken to verify effectiveness of mission should carry out the following tasks:
controls). Attachments to the report should
(a) Preparation:3
include an updated financial-management
performance assessment (see exhibit G-3 (i) Consult the results of the latest
Summary of Project Fiduciary Risk Assessment at external-audit-report review prepared
Supervision), an SOE review checklist (see exhibit by FMD;
G-1 Checklist for statement of expenditure (SOE)
(ii) Review the most recent project
review) reflecting mission findings, and the
progress reports.
proposed PSR ratings for FM. In this context,
the results obtained after the on-site review (b) Reassess the project FMA performed
would be either: at design:

(a) Confirmation that the FM arrangements (i) Use the original FMAQ4 as the basis
are functioning as planned, with FMD for reviewing relevant information to
staff confirming verification that such reassess the strengths and weaknesses
arrangements are sufficient and effective for of FM systems;
the project; or (ii) Review actions taken to address
(b) Indication that only some or none of recommendations of the previous
the FM arrangements are functioning as year‘s supervision review,
recommendations raised by
external auditors regarding previous

3 Exhibit G-5 contains other documentation and information relevant/useful to the mission.
4 See exhibit G-2 Detailed FMAQ Project Fiduciary Risk Assessment at Supervision.

72
years’ management letters, and (b) Appendix 1: Summary of project
recommendations raised by FMD status report (PSR), covering:
during the audit review exercise; (i) disbursement rates of domestic
and cofinancing funding sources
(iii) Perform an FM performance
(section A, Basic Facts); (ii) ratings
assessment, using the questionnaire
for fiduciary aspects indicators
provided as exhibit G-2 Detailed FMAQ
(section B.1); (iii) description of
Project Fiduciary Risk Assessment at
fiduciary risks and their impact
Supervision;
on project performance (section
(iv) Review sample WAs and SOEs to C.5); and (iv) follow-up action on
verify the adequacy, completeness and fiduciary aspects (section D);
validity of claims, using the checklist
(c) Appendix 5, Financial: actual
provided as exhibit G-1 Checklist for
financial performance by financier;
statement of expenditure (SOE) review;
disbursements by category and by
(v) If relevant, meet the SAI or the private component: tables 3A, 3B and 3C;
audit firm to discuss issues raised in
(d) Appendix 6, Compliance with
the latest audit report;
Loan Covenants: status of
(vi) If relevant, meet cofinanciers to discuss implementation – assessment
their FM experience. of loan covenants in relation to
fiduciary aspects.
(c) Reporting:
40. IFAD manages its financing and that of external
(i) A brief draft report is to be provided to
donors so as to ascertain that proceeds are
the FO/CPM, including:
disbursed in accordance with IFAD guidelines
(a) Updated FM performance and policies and with the legal clauses specified
assessment; in the FA. From IFAD’s viewpoint, standard
(b) Summary of Project Fiduciary Risk procedures consist of two major monitoring
Assessment at Supervision tasks: disbursement, and audit and reporting.
(exhibit G-3); (a) Disbursement monitoring and
(c) SOE review checklist (exhibit G-1) authorization. Procedures for the review
reflecting mission findings; and approval of WAs are set out in
module H.
(d) PSR ratings on quality of FM,
audit, compliance with the FA and (b) Audit and reporting. The B/R is responsible
disbursement. for ensuring that projects are audited
on a regular and timely basis. As part
(ii) Provide inputs to the aide-memoire of the financing management process,
as follows: IFAD examines the procedure for the
(a) Input to main body of the aide- appointment of auditors, monitors the
memoire, section E. Fiduciary timeliness of financial statements and audit
Aspects, covering: (i) FM; (ii) reports, reviews audit reports to ensure that
disbursement; (iii) counterpart project audits are conducted in accordance
funds; (iv) loan covenants; (v) with IFAD policies and procedures, and
external audit (including follow-up follows up on issues raised by auditors.
to the findings of the audit review Module I details IFAD audit requirements,
exercise performed by FMD); and including monitoring procedure and
(vi) the summary PFR assessment remedies in the case of non-compliance.
table specifying agreed actions, 41. Procedures (including checklists) relating to
responsibilities and dates with IFAD’s process for disbursement are provided
respect to fiduciary mitigation in module H.
actions, as relevant;

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G.7 Financial management support
42. It is mandatory that at least one FM mission (a) FOs, in collaboration with CPMs, are
be fielded for each project at least once per responsible for monitoring the ongoing
year. Supplementary missions may be required adequacy of fiduciary arrangements.
according to the particular situation or (b) Reassessment of project fiduciary risk is
supervision needs of the project. Such support primarily based on results of the fiduciary
is usually intended to monitor compliance with risk assessment undertaken during project
financing conditions and to provide guidance implementation, based on periodic project
and support to B/Rs and project executing supervision missions. This may comprise
agencies, with a view towards efficient project a desk review of project documents
implementation and disbursement of loan/grant and reports, as well as field supervision
proceeds. The intention may also be to monitor missions when appropriate. Findings on
specific aspects of financing use (for example, internal controls and fiduciary concerns,
review of supporting documents concerning the as reported in project audit reports, should
amounts withdrawn on the basis of SOEs – see also be taken into consideration.
module H).
(c) The FO or FMS should carry out
43. Disbursement guidance. Through the LtB/R, reassessment of the fiduciary risk using
the FO and CPM specify withdrawal procedures the methodology presented below and as
to be followed by B/Rs and are responsible for specified in the detailed FMAQ (See exhibit
providing guidance to the B/R to ensure prompt G-2 Detailed FMAQ Project Fiduciary Risk
loan use, and for monitoring compliance with Assessment at Supervision). The Summary of
loan conditions. Loan financing management PFR Assessment at Supervision table (See
support missions focus on: exhibit G-3 Summary of Project Fiduciary Risk
(a) Training PIU staff, who are responsible for Assessment at Supervision) should be used to
the preparation of WAs; summarize the findings and conclusions.

(b) Guidance on problems that may lead to (d) The PSR is the instrument used by PMD
delays in disbursement; during the annual portfolio review process
to assess the status of a project in terms of
(c) Resolution of problems that have arisen fiduciary aspects, implementation progress,
with individual applications; etc. The FO enters the ‘quality of financial
(d) Monitoring use of the DA (module H, management (B1.1)’ rating (within the
section H.5), both to verify adequacy of ‘fiduciary aspects’ component of the PSR
controls and to ensure that they are being summary) in the respective column of
implemented correctly; the database of risk ratings (usually by 30
June of each year). This is done to reassess
(e) Review of the use of SOEs to verify the project’s fiduciary risk rating during
adequacy of systems and controls. Findings implementation.
arising from these reviews should be
summarized and attached to the back- (e) Annual project audit-report review
to-office report. A Checklist for statement ratings are considered when assessing the
of expenditure (SOE) review is provided as ‘quality and timeliness of audits’ rating
exhibit G-1; during the portfolio review process. Audit
ratings are meant to reflect the quality
(f) Examination of supporting documents in a and scope of audits and compliance with
random sample of SOE applications. covenants related to timeliness. These are
44. These missions are usually conducted by the updated annually (usually by 31 August)
FO assigned to the country and/or a specialized following the project’s audit review. The
service provider. The following PFR assessment FOs responsible for performing the review
procedures are to be undertaken during are responsible for ensuring that audit
supervision missions: review ratings for their respective projects
are reflected in the Audit Report Tracking
System (ARTS) and taken into account
during the portfolio review exercise.
74
(f) All project risk ratings should be reassessed (g) Where there is disagreement between FMD
at least annually. For projects with a high and PMD as to the reassessed fiduciary
risk rating, a more frequent reassessment risk rating for a project, the Director, FMD,
of fiduciary risk during implementation as the authority responsible for ensuring
is recommended. Where a supervision that appropriate financial management
mission is scheduled to take place after a procedures, including disbursement, are
gap of more than a year after the previous applied, will have the final decision.
mission, the FO should raise the fiduciary 45. The FM capacity assessment questionnaires
risk rating by one notch, and this revised to be completed during these missions are
rating should remain in place until the provided in exhibit G-2 Detailed FMAQ Project
results of the next mission are assessed. Fiduciary Risk Assessment at Supervision.

G.8 Interim financial reports


46. The primary objective of financial reporting (a) They are not necessarily generated directly
is to help monitor financial progress and from accounting systems being used for
provide assurance that financing proceeds have projects. As a result, it is not possible
been used for the intended purposes during a to rely on them to determine if normal
reporting period. accounting controls have operated in these
reports.
47. The benefits of IFRs:
(b) IFRs might provide unreliable information,
(a) They disclose deviations from the financial
due for example to inaccuracies, absence
plan and help provide potential solutions
of audit trails, unexplained inconsistencies
to problems identified;
and incomplete financial information.
(b) Provide more timely information on
(c) Currently there is no standard practice for
project performance and help early
review of IFRs by FOs and PMD colleagues.
identification of lapses in financial
accountability. Audit reports provide (d) Connection is lacking between quarterly
the same benefit, but are generally only IFRs and AFSs.
provided annually;
49. Principles of IFRs. The guiding principles can
(c) Strengthen the internal control system of be summarized as follows:
the project through improved monitoring
(a) The overall objective is to provide regular,
and communication between finance,
timely financial information, offering
procurement and M&E staff and project
fiduciary assurance to IFAD during a
management;
reporting period that the funds are being
(d) Link financial information to physical used for the purposes intended and in the
progress and, as a result, help evaluate most efficient way. IFRs should also focus
the financial impact of project activities on providing comparative figures with
and direct them towards achieving project respect to the AWP/B and PDR.
outputs;
(b) IFRs are not isolated. They should be
(e) Help monitor continued adequacy of AAs read together with related documents
(through information on bank balances), such as the AWP/B, WAs, annual project
and streamline disbursement planning. financial statements and audit reports – as
well as implementation, supervision and
48. In addition to the benefits outlined above, it
completion reports – to get a complete
is also important to be aware of the general
picture of the financial progress of a
weaknesses or risks of IFRs:
project. As far as possible, the B/R should
not be required to provide IFAD with
information already available to the Fund.

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(c) The format of IFRs should preferably follow (f) The financial information presented in
the IFAD sample format as presented IFRs should always be generated using
in exhibit I-4 Guidance Note on Interim proper accounting software. Excel is not an
Financial Progress Reports. However, the acceptable form of accounting software and
project can choose another format as long should only be used to edit and combine
as it is acceptable to IFAD. During the data to fit the agreed format.
design phase, the FMS/FO should look
(g) IFRs should be submitted on at least a
into national and other-donor reporting
semi-annual basis. However, submission
requirements to harmonize reporting
on a quarterly basis is recommended. Non-
formats and reduce project workload. The
submission or irregular submission of IFRs
B/R’s own reporting systems should be used
should be seen as a red flag and should be
as far as possible in generating the IFRs,
followed up by the FMS/FO.
and common reporting and monitoring
arrangements should be agreed with other (h) As with the annual project financial
donors involved in the project. statements, only the cash beneficiary
contribution should be reported in the
(d) Projects should prepare IFRs using the same
IFR, consistent with the entry in the
accounting basis/standard they use when
accounting system. The in-kind beneficiary
preparing annual financial statements.
contribution should not be included
Otherwise, the financial date of the IFR will
in the reported figure under beneficiary
not reconcile with the data of the audited
contributions, although the project should
annual financial statements.
track this for other reporting purposes.
(e) Similarly, the currency of IFRs should be
(i) Although IFRs focus mainly on financial
that of the annual financial statements. This
data, some additional management
can be either the denomination currency
information reports (fixed asset register,
(the currency in which transactions are
signed contract listing) and physical
recorded in the accounting system – usually
progress indicators may also be included.
the local currency) or the presentation
From an FM point of view, this is
currency (another currency in which
encouraged and desirable, as these reports
the transactions are recorded in the
motivate the financial controller/chief
accounting system, e.g. US$). The selection
accountant, M&E officer, procurement
of a presentation currency other than
officer and project director to communicate
the functional currency should be agreed
with each other and compare figures,
with IFAD/FMD during preparation. In
reducing the risk of collusion, fraud and
these cases, the accounting capacity of
mismanagement.
the project should be strengthened by
including guidance on the exchange rates (j) Once the project begins producing IFRs,
to be used for conversion of transactions auditors should certify that project financial
and balances in the PIM/FM manual. The statements are in accordance with data
exchange rate conversion should be in shown in the IFRs, as this would increase
line with the accounting standards used. IFR credibility. This could be specified in
Note that an exchange gain/loss is not an auditor TORs and is important in moving
eligible expenditure in itself, and should towards report-based disbursement.
not be reported as a separate expenditure 50. Content of the IFR and sample reports
item. Instead, if there are realized gains/
losses, these should be entered in specific, (a) The aim of IFRs is to answer the following
approved expenditures/expenditure questions regarding a reporting period:
categories. Exchange rate differences on what expenditures were incurred, paid for
conversion of the opening and closing by which financing source, at what time
bank balances (i.e. unrealized gains/losses) and purpose.
should be disclosed separately.

76
(b) There is no one report that could provide (iv) Implementing partner monitoring
all this information; as a result, a set of report;
reports is needed. Exhibit G-7 provides a set (v) Training and workshop monitoring
of mandatory reports to be provided by the report (if such expenditure is a
project, either quarterly or semi-annually. significant proportion of total);
These reports should be accompanied with
a set of explanatory notes and key checks to (vi) Project management cost report;
make them as clear as possible for project (vii) Fixed asset register.
staff. As the ideal set of reports depends on
the project’s activities and the project risk (e) The need and capacity for such reports
profile, some supplementary reports might should be based on risk/FM capacity
also be included to complete the set. assessments and should be jointly
discussed by FOs and CPMs during the
(c) Mandatory reports: project design process. A sample table
(i) Sources and uses of funds (all of supplementary reports is presented in
financiers); exhibit I-4.

(ii) Summary of expenditures by loan/ (f) Generally speaking, expenditures reported


grant categories and by financiers; in IFRs (totals and by financier) should
match those reported by the project to
(iii) Financial performance by financier the government, as well as other possible
and by component; financiers. FMD staff should request
(iv) Statement of expenditures/ that a copy of reports submitted to the
disbursements – WA statement; government accompany IFRs submitted to
IFAD.
(v) DA reconciliation statement (imprest
account/revolving fund); 51. Reviewing the reports. When a project is in its
implementation phase and already producing
(vi) Cash flow forecast;
IFRs, the FO should review these reports and try
(vii) Progress report on audit to amend/complement them (if necessary) to
recommendations. reflect the IFAD IFR sample format and the risk
profile of the project. In this regard, supervision
(d) Supplementary reports are to be
missions provide a good opportunity to discuss
customized to fit a project’s activity and
and inform project financial staff of the required
risk profiles, but could typically include the
report formats and their benefits. The final
following:
agreed format should be communicated to the
(i) Procurement progress report; project by amending the LtB (see exhibit G-6 –
(ii) Physical progress report; Checklist for review of IFRs).

(iii) Rural finance/credit line report;

G.9 Accounting and reporting standards


52. Accounting procedures must meet international confirm compliance. When alternative national
standards. Standards acceptable to IFAD include accounting standards are in use, FMD staff must
IPSAS, which may be on a cash or accrual basis. determine if the gaps would have a significant
For PIUs that are revenue-earning entities, IFRS impact and assess, case-by-case, if they may be
are appropriate. FMD staff must familiarize accepted. This assessment may be based also
themselves with key aspects of these standards on data provided by other IFIs such as the
relevant to project financial statements and must World Bank.

Module
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G.10 Financing closure
53. The loan/grant account is closed by ACD after (c) By the Financing Closing Date, the B/R
the Financing Closing Date, upon receipt of the must have submitted the final WA, PCR
confirmation from PMD and FMD in a timely and final audit report to IFAD (and to the
manner that processes as per paragraph 57 CI, if applicable), along with a response
below are fully satisfied. to any issues raised by the auditor. The
B/R should also have fully justified the
54. GC section 12.02(b) provides, “Any
DA or refunded any balance not justified.
amounts remaining in the Loan and/or
Grant Accounts shall be cancelled on the (d) In the event the B/R wishes to request
Financing Closing Date, except for any additional time to justify an advance,
unwithdrawn balances of applications or to comply with the submission of all
for withdrawal received by the Financing required documentation, the B/R should
Closing Date…”, submit an official communication prior
to the Financing Closing Date requesting
55. Closing procedures.
additional time with rationale. The request
(a) Closing notices. IFAD sends three may also be initiated internally by IFAD,
automated closing notices by email and submitted to the Director, FMD, for
directly to the Project Coordinator, approval. After approval of the Director,
with copies to relevant project finance FMD, the Fund may agree to accept WAs for
staff and IFAD staff (a copy of each justification for a period of six (6) months
email should also be sent to the CI after the Financing Closing Date (or longer
where applicable), to advise them if required). Approval should be obtained
that the loan/grant account will be prior to the Financing Closing Date,
closed on schedule, remind them however exceptions may be considered
of submission requirements prior within the six (6) months following the
to closure (see paragraph 55 (c) Financing Closing Date, at the discretion of
below) and of the conditions related the Director, FMD. The B/R is subsequently
to eligibility and/or ineligibility of notified of the approval (and the CI, if
expenditure at completion as outlined applicable).
in Module E.8 paragraph 19. The notices
(e) Appropriate audit coverage for expenses
are issued in six month intervals as follows:
incurred during the period between the
(i) Six months before the Project completion and closing dates should
Completion Date; be decided by the FO depending on the
(ii) On Project Completion Date; materiality and project circumstances:

(iii) On Financing Closing Date. (i) extending the period under audit
beyond the financial year-end to
(b) During the six-month period prior to include this period;
closing, there may be a higher frequency
of WA submissions, which whenever (ii) accruing closing period expenses as
possible, should be grouped together. liabilities in the financial statements
Engagement with project accountants for the period ending with the
is recommended in order to manage this completion date; or
process. (iii) relying on an authorized WA for
SOs for un-audited closing period
expenses.

78
(f) Particular care should be taken when (ii) There are no missing WAs; if a
effecting the final disbursement to/ on missing WA is noted, the status of
behalf of the B/R to ensure that the total the WA must be verified with the
authorized financing amount in the project/CPM;
denomination currency is not exceeded. (iii) The CPM has received confirmation
Final disbursements to the B/R may be in from the project that the last WA has
a different transaction currency (e.g. US$ been sent.
or a national currency of the B/R) than
that of the denomination currency (e.g. Authorized allocation (AA)
SDR). They are entered as a withdrawal (iv) All ineligible expenditures have been
against the loan/grant account using the refunded;
applicable exchange rate on the actual
value date of payment. When financing (v) AA has been fully justified, or
is near full disbursement, modest refunded or written off (small
variations in the exchange rate between amounts) in FXC.
the approval and value dates could lead Final reports
to an over-disbursement. Guidance Note
(vi) Final audit report has been received
7 – Payment of Final Disbursement has
and reviewed b y t h e F O and
been provided as exhibit G-8.
deemed satisfactory to the Fund;
(g) The Disbursement Officer (DO) should and
ensure that a buffer is available to cover
(vii) PCR, if applicable, has been
possible exchange rate fluctuations.
satisfactorily received by CPM and
The size of the buffer depends on the
any required follow-up action taken.
currency of the disbursement and on the
approved amount. (b) The Fund and the B/R should agree
on the disposition of project assets on
56. Where an additional financing instrument
completion (GC section 7.16).
is ongoing, but the original financing
instrument(s) for that project is/are fully (c) The loan/grant accounts will be kept open
disbursed, then the latter should be closed after the Financing Closing Date
in accordance with the procedures described for a period not to exceed six months
above provided that: (or longer, subject to necessary approvals
in accordance with Module E.8 paragraph
(a) The expenditures have been included in
19), if this is required, in order to:
the AFS; and
(i) Disburse any withdrawal for which
(b) The FO and CPM have agreed to waive
a WA was received prior to the
the requirement for submission of a
Financing Closing Date;
PCR (on the basis that it will be done
once all financing instruments have (ii) Accept WAs for justification in
reached the Financing closing date). accordance with para. 55 d) above;

57. Closure of IFAD loan/grant accounts (iii) Permit IFAD to take remedial action
with regard to audits of the project;
(a) Prior to formal closure of the IFAD loan
and/or grant account, ACD requires (iv) Permit IFAD to take remedial action
timely confirmations from PMD and with regard to the PCR; and
FMD through a closing checklist that the
following agreed processes are completed:
Withdrawal applications
(i) There are no WAs pending that were
received prior to the Financing
Closing Date;

Module
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(v) Receive any refund the B/R is required (e) Upon final closure of the loan/grants account,
to make. If the B/R has not made an official letter is sent to the B/R with copies
all required refunds of unjustified sent to relevant internal stakeholders, which is
obligations as of the date of closure of signed by the Director and Controller, ACD.
the loan/grant accounts, the remedies This formal communication is sent so as to:
in line GC section12.01(a)(ii) will
(i) notify the B/R of the closure of the
be applied.
loan/grant account;
(d) Closure of the loan/grant account entails
(ii) provide a status of loan/grant funds (a
ACD to:
historic transaction report); and
(i) Cancel any unspent loan/grant
(iii) provide final amortization schedule
balance in FXC;
which is revised following cancellation
(ii) Close loan/grant account in FXC. of the unused balance (see module J,
section J.3).

80
G.11 Loans and Grants System and tools
58. The table below shows the systems currently in
use in IFAD to record financial data on IFAD
loan and grant operations, and to monitor
performance, FM and compliance with FA
conditions. Available reports can be accessed
through the IFAD Intranet.

System Description
FlexCube (FXC) IFAD financial system to record financing instruments,
loan and grant disbursements, and loan repayments.
Fully integrated with Oracle BI, cash management and
accounting. Integration with other corporate systems,
such as GRIPS
Grants and Investment Projects System (GRIPS) Corporate system to record projects financed through
investment or grant programmes. Financial instrument
numbers are created in GRIPS and interfaced with FXC
so they are the same throughout all IFAD systems
Oracle Business Intelligence (BI) Reporting tool to generate reports, manually or
automatically, for internal or external stakeholders.
For example, billing statements and debit advices are
automatically generated and distributed to the list of
recipients maintained in FXC
Withdrawal Application Tracking System (WATS) Tracking system to monitor the processing of WAs for
loans and grants

Audit Report Tracking System (ARTS) Tracking system to monitor submission and quality of
audit reports for investment projects and grants
Financial Management Dashboard (FMDB) Management tool to monitor financial performance of
projects. Integration with the IFAD Client Portal (ICP)
IFAD Client Portal (ICP) External stakeholders’ online portal, providing
information and offering a secure environment to initiate
financial transactions and document upload (including
WAs, related documents and banking instructions).
Integration with GRIPS, FMDB and the Oracle Data
Warehouse
Oracle Data Warehouse Corporate data repository offering ACD/FMD/PMD-
specific reporting. Integration with the ICP

Module
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WITHDRAWAL AND DISBURSEMENT
MODULE H
Module H
Withdrawal and disbursement
• Legal provisions for withdrawal of financing
• Conditions for withdrawal
• Disbursement arrangements and procedures
• Disbursement documentation/statements of expenditure
• Designated account
• Reimbursements
• Direct payments
• Special commitments
• Processing disbursements
• Processing disbursements during suspension

84
H.1 Legal provisions for withdrawal
of financing
1. Article 4 of the General Conditions sets out (d) Any amount withdrawn from the loan/
core principles with respect to the withdrawal of grant accounts to finance an expenditure
funds: other than an eligible one, or not needed
thereafter to finance eligible expenditures,
(a) No withdrawal (except start-up costs) can
must be refunded to IFAD by the B/R (GC
be made from the loan/grant accounts
section 4.09).
before approval of the first AWP/B by the
Fund and fulfilment of all other conditions 2. GC section 4.01 provides, “Upon the entry into
precedent to withdrawal, as stipulated in force of a Financing Agreement, the Fund shall
the FA (GC section 4.02(b)). open a Loan Account and/or a Grant Account in
the name of the Borrower/Recipient and credit
(b) GC section 4.02(a) provides, “Between
the principal amounts of the Loan and the
the date of entry into force of the
Grant respectively thereto.” These loan and grant
Agreement and the Financing Closing
accounts are ledger entries in the accounting
Date, the Borrower/Recipient may request
records of IFAD, and the B/R can only withdraw
withdrawals from the Loan Account and/
from these accounts subject to the provisions
or Grant Account of amounts paid or to be
of the FA and the General Conditions and in
paid for Eligible Expenditures. The Fund
accordance with the procedures established
shall notify the Borrower/Recipient of the
by IFAD.
minimum amount for withdrawals.”
3. GC section 4.05 states, “Upon receipt of an
(c) Requests for withdrawals are subject to
authenticated and satisfactory application for
submission of an appropriate application,
withdrawal from the Borrower/Recipient,
together with the required supporting
the Fund shall transfer to the account specified
documentation and authorized signature(s)
by the Borrower/Recipient the amount
(GC section 4.04).
specified therein.”

H.2 Conditions for withdrawal


4. Section E of the FA indicates any additional may not be used for these expenditures prior
(generic/specific) conditions precedent to to compliance, and any amounts so withdrawn
withdrawal, apart from IFAD approval of the are subject to refund. Any other WAs submitted
AWP/B. Where only certain specific expenditures prior to compliance are returned.
are subject to conditions for withdrawal, their
6. The CPM monitors compliance as part of
category allocations, provided in schedule 2,
the supervision process and is responsible
are shown separately, where possible, so as
for determining, with support from LEG and
to ensure that project implementation and
FMD, when withdrawal conditions have been
expenditure can continue where these specific
met. When conditions are met, the CPM
additional conditions are not applicable.
sends notification to this effect to the B/R, and
Categories that cannot be disbursed until
informs FMD and ACD so that the FXC may be
satisfaction of conditions precedent to
updated to reflect compliance and availability
withdrawal should be clearly defined.
of funds in the relevant category(ies) for
5. In the LtB/R, the B/R is advised to withhold any disbursement purposes.
applications related to a specific component or
category(ies) subject to withdrawal conditions
until these conditions have been met. DA funds

Module H
A 85
H.3 Disbursement arrangements and
procedures
7. Disbursement arrangements comprise a set of 10. Minimum value of WA for replenishment
procedures grounded in the Fund’s fiduciary and reimbursement. The B/R is requested to
policies and procedures, which are in turn use the advance procedure/DA for all eligible
derived from its mandate to ensure that financing payments, including those above the minimum
proceeds are used only for the purposes intended. application value, provided sufficient funds are
These arrangements complement other policies available in the account. They are encouraged
and procedures designed to provide that to reduce the frequency of WAs for DA
assurance, such as FM and auditing. replenishments and reimbursements, and for this
purpose, a threshold is stated in the LtB/R of a
8. Disbursement arrangements comprise
minimum value for WAs for replenishment and
disbursement procedures and supporting
reimbursement.
documentation.
11. Application for replenishment of the DA
9. The following disbursement methods1 may be
should be made by projects when the amount
used by B/Rs to withdraw financing proceeds:
withdrawn from the DA for expenditure incurred,
(a) Advances to the DA: initial deposits and but with a WA not yet submitted, is equal to
subsequent replenishments/justifications of about 20-30 per cent of the amount advanced as
advances to DAs; the initial deposit. This is intended to minimize
(b) Reimbursements: where the B/R prefinances the number of transactions in the loan account.
project financing costs; This threshold should not include amounts
transferred from the DA to project operational
(c) Direct payment: payments made by the Fund bank accounts, but not yet spent. This level is the
to contractors on behalf of the B/R using minimum amount that must be reached before a
financing proceeds. project submits the WA to IFAD.

H.4 Disbursement arrangements


and procedures
12. Advances and initial deposits. In principle, it been properly spent for Eligible Expenditures.
is up to the B/R to decide how much it needs The Fund may place reasonable limits on
to withdraw, and where the funds should be the amount that the Borrower/Recipient may
sent. In practice, however, IFAD usually imposes withdraw in advance or the overall balance
limits on the amount that can be withdrawn of such advance withdrawals, and may
and how funds withdrawn in advance are require that such amounts be held in a freely
managed. This is in line with GC section convertible currency and/or be held in an
4.04(d), which states that “If the Borrower/ account designated for that purpose ….” The AA
Recipient requests a withdrawal from the Loan (or imprest ceiling) amount is the maximum
and/or Grant Accounts for amounts to be paid amount of advance that can be outstanding
thereafter for Eligible Expenditures, the Fund at any time. This is determined during project
may, before transferring such amount to the design, taking into account the nature of eligible
Borrower/Recipient, require that the Borrower/ expenditure, and implementation and flow
Recipient provide evidence satisfactory to the of funds arrangements, and is defined in the
Fund showing that previous withdrawals have LtB/R. Advances outstanding at any time during

1 The SC procedure was available to borrowers for financing imports of goods under a letter of credit, for which the Fund makes
a commitment to guarantee the letter issued by a bank for the B/R. This procedure will no longer be offered to borrowers for new
projects, and they will be encouraged to seek alternative mechanisms.

86
project implementation should not exceed the justified by satisfactory evidence is high, IFAD
ceiling amount (unless through mutual, written may impose a limit on subsequent withdrawals
agreement). or initiate recovery of outstanding advances
against future WAs. The purpose of these
13. As a rule, the B/R should not withdraw in
measures is to ensure that the B/R does not have
advance more than the amount budgeted for
to refund withdrawals at project end.
any project year in the AWP/B. If the CPM and
FO agree that a lower amount is appropriate, 16. Justification, replenishments. Expenditures
the B/R should be informed of the applicable are incurred periodically and are reported by
amount either in the LtB/R or a subsequent the project through a WA for replenishment.
communication. The total AA need not be Projects should submit WAs on a quarterly basis
drawn down in a single tranche/advance, or when 20-30 per cent of the initial advance
and the LtB/R template provides for multiple has been spent on eligible expenditure. This
advances to be made within the AA based requirement should be stated in the LtB/R. For
on expenditure needs. The AA should be set imprest advances, expenditures are incurred
based on the highest peak of projected yearly periodically and are reported by the project
expenditure, so that, as advances increase through a WA for replenishment, based on
gradually, there will be no need to change supporting documentation/SOEs for amounts
the LtB/R. The target advance level could be spent.
an average of six months’ equivalent forecast
17. For revolving fund advances, the frequency of
expenditure for medium-/high-risk projects
replenishments varies depending on the pace
and up to nine months’ forecast for low-risk
of actual expenditure and the related reporting.
projects. The advance level should be monitored
Regular replenishment requests for the DA are
regularly by FMD staff based on IFRs, or at
the best way to ensure that the account is used
each supervision mission, to ensure that the
correctly. WAs should normally be submitted
project has adequate liquidity for projected
quarterly, irrespective of the period of advances,
expenditures. To facilitate this monitoring,
to allow for regular justification. Variations of
projects should submit semi-annual expenditure
this interval will be aligned to the risk ratings.
forecasts, which can be derived from approved
Reported expenditures are recorded against the
AWP/Bs and integrated into the semi-annual
expensed categories as justifications, first against
IFRs (see module G and exhibit I-4 Guidance
the oldest outstanding advance and then against
Note on Interim Financial Progress Reports). FMD
subsequent advances using the first-in/first-out
staff are encouraged to adjust advances to the
principle. The next advance will be granted
project in the light of the changing pace of
when at least 50 per cent of the previous and
expenditure during the project implementation
100 per cent of all preceding advances have been
period.
justified. Expenditures must be reported within
14. Lower limits on the amount that may be a 12-month rolling period, or as is specifically
withdrawn in advance should only be imposed detailed in the FA and LtB. If the justification
as above; or when a determination has been criteria noted above have been met, funds
made that the B/R lacks the capacity to manage have been used for the purposes intended in
a larger amount, or to avoid any misuse by the accordance with the approved AWP/B, and the
B/R due to the nature of concessional financing outstanding balance advanced is insufficient
(i.e. withdrawing larger amounts to invest these for the next period of AWP/B expenditures, a
with interest). The interest payable to IFAD new request for an additional advance will be
may be greater than interest earned on the DA submitted, based on the AWP/B for the next
advances, and depreciation of the DA currency period. ACD staff will apply this logic when
may occur, which could reduce the value of the reviewing WA submissions.
IFAD financing.
18. If there are amendments to the AWP/B
15. The B/R should provide satisfactory evidence during the year, these revisions must be
that previous withdrawals have been properly shared with FMD and with ACD, so as to
spent for eligible expenditures. Towards the allow them to consider any implications
end of the project implementation period, if for advances to the DA.
the overall balance of advance withdrawals not

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19. IFAD allows B/Rs to use SOEs for withdrawals proposed procurement decisions for larger
from the loan/grant accounts when the expenditures before B/Rs can award contracts.
expenditure amounts are small and
22. The use of SOEs in the place of normal, fully
documentation is voluminous. The types
documented WAs makes it impossible for
and categories of expenditures eligible for
IFAD to conduct an independent review of the
SOE withdrawals and applicable thresholds
supporting documents for every expenditure
are spelled out in the LtB/R. SOE thresholds
prior to the issuance of a disbursement
are determined by the results of country and
authorization. It is used where it is impractical
project-specific assessments conducted during
for the project to provide full supporting
the project design phase (module D). It is
documentation. The following alternative
important that these thresholds adequately
ex post review mechanisms are used to verify
reflect the FM capacity of the project and take
the eligibility of items claimed under SOEs.
into account the adequacy of its system of
internal controls. Exhibit G-1 provides the (a) Supervision missions use random sampling
methodology for on-site review of project SOEs. techniques to verify that the SOE procedure
has been employed correctly, that the
20. Statements of expenditure. SOE thresholds
required documentation supporting the
are determined by FMD staff after considering
SOEs has been properly maintained in the
underlying fiduciary risks, including overall
files and is readily available for inspection,
project FM risks and the probability and
that adequate arrangements have been
impact of control risks for relevant expenditure
made for timely submission of SOE audit
categories. Where there are significant
reports, and that SOE forms contain
changes in the project and/or the country
sufficient information to assist supervision
FM environment, or a new assessment of the
missions in the review process. Such
financial risk situation (e.g. based on findings
reviews are mandatory by FMD staff or an
of supervision missions), IFAD may decide to
FMS back to office report.2
modify the SOE thresholds and will notify the
B/R accordingly through revisions to the LtB/R. (b) To facilitate this check, additional
Since the introduction of risk-management information is available on the audit
disbursement procedures, FMD reviews SOE trail of each SOE transaction. This audit
thresholds continuously. Where these are rated trail should be used to verify transactions
low risk for the project, SOE thresholds are during supervision missions and when
revised upwards and the borrower is informed processing disbursements. Following
through an amendment to the LtB/R. Where the introduction of ‘Smart SOEs’,3 SOE
ratings are of high/medium risk, SOE thresholds thresholds should be eliminated from low-
are either maintained at the level decided in risk projects. For medium-risk projects, staff
the design phase, or may be reduced if the have the options of eliminating thresholds,
borrower’s capacity is not at the level forecast when considered appropriate, or of
originally. documenting specific transactions extracted
from the Smart SOE4 on a sample basis.
21. The SOE threshold on contracts applies to the
total value of contracts or expenditures, which (c) Independent auditors appointed by the
may vary according to the type of expenditure. B/R are required under the provisions of
For contracts with values above SOE thresholds, the IFAD Guidelines on Project Audits to
all related WAs must be accompanied by the supply an opinion on the adequacy of
normal supporting documentation. SOE the systems used to prepare SOEs and on
thresholds on small contracts are normally the availability of appropriate supporting
set at or below the procurement prior-review documentation. IFAD is responsible for
threshold, as IFAD reserves the right to review monitoring audit reports to ensure that
they are received promptly and that they
2 See exhibit G-1 Checklist for statement of expenditure (SOE) review.
3 In November 2014, the Controller’s and Financial Services Division (CFS) introduced a modified format of SOEs under the label
‘Smart SOEs’. Applicable to advances and replenishments only, the modified SOE format provides additional control information,
thus avoiding the need for submission of supporting documentation. The additional information discloses the complete audit trail of
each expenditure item, i.e. specific itemized references to approved budgets (AWP/B), payment voucher and bank statement.
4 Exhibit H-3 provides the forms for Smart SOEs.

88
provide a satisfactory opinion with respect United Nations, shall not be eligible for
to the use of SOEs. financing by the Financing.
(d) ACD staff conduct ex post reviews of a (d) Any payments to a person or an entity,
sample of disbursements made for low- or for any goods, works or services,
and medium-risk projects on a regular basis if making or receiving such payment
throughout the year, to determine whether constitutes a coercive, collusive, corrupt or
the risk-based disbursement guidelines fraudulent practice by any representative of
have been followed. The work and findings the Borrower/Recipient or any Project Party,
are summarized in an ex post controls shall not be eligible for financing by
report, which is shared with the division the Financing.
and FMD.
24. The concept of eligible expenditures is
23. Eligible expenditures. GC section 4.08 fundamental to the financing of projects by
provides that: IFAD. GC section 4.08 establishes positive
criteria that are necessary for an expenditure to
(a) The Financing shall be used exclusively to
be eligible, but it might be more useful to make
finance expenditures meeting each of the
a list of expenditures that would not be eligible:
following eligibility requirements:
• An expenditure for a cost that is not
(i) The expenditure shall meet the
‘reasonable’;
reasonable cost of goods, works and
services required for the Project and • An expenditure that is not for ‘goods,
covered by the relevant AWPB and works or services’;
procured in conformity with the
• An expenditure that is not required for
Fund’s Procurement Guidelines.
the project;
(ii) The expenditure shall be incurred
• An expenditure that is not covered by
during the Project Implementation
the relevant AWP/B;
Period, except that expenditures to
meet the costs of winding up the • An expenditure for goods, works or services
Project may be incurred after the that are not procured in conformity with
Project Completion Date and before IFAD’s Project Procurement Guidelines;
the Financing Closing Date. • An expenditure not incurred during the
(iii) The expenditure shall be incurred by a project implementation period, unless it
Project Party. is for winding-down costs, in which case
it must be incurred before the financing
(iv) If the Agreement allocates the amount
closing date;
of the Financing to categories of
Eligible Expenditures and specifies • An expenditure not incurred by a project
the percentages of such Eligible party (e.g. unjustified advances to service
Expenditures to be financed by the suppliers or project staff);
Financing, the expenditure must relate • An expenditure that relates to a category
to a category whose allocation has not that has been depleted;
been depleted, and shall be eligible
only up to the percentage applicable to • An expenditure that relates to a category for
such category. which conditions precedent to waithdrawal
have not yet been met;
(v) The expenditure shall be otherwise
eligible in accordance with the terms • An expenditure that is prohibited, implicitly
of the Financing Agreement. or explicitly, by the FA;

(b) The Fund may from time to time exclude • An expenditure of a type that IFAD has
certain types of expenditure from eligibility. decided to exclude, provided that the B/R
has been properly informed in advance of
(c) Any payment prohibited by a decision of such exclusion;
the United Nations Security Council taken
under Chapter VII of the Charter of the

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• Any expenditure made in violation of (c) The summary SOEs extracted from the
sanctions imposed by the United Nations DA by expense category, distinguishing
Security Council; between contracts subject to IFAD prior
review and those subject to post review.
• Any expenditure that constitutes a coercive,
collusive, corrupt or fraudulent practice, as 28. The FMR package is normally prepared on a
these terms are defined in GC section 2.01. quarterly basis and submitted to IFAD with the
advance WA within 45 days of the end of the
25. The final determination as to whether an
quarter. Subsequent advances will usually be
expenditure is eligible is made by IFAD (or the
made on the basis of reporting received for the
CI, if one has been appointed) in the context
preceding quarter, together with an updated
of its financial administration of the project.
cash flow forecast.
If, at any time, IFAD discovers that any amount
of its financing has not been used for eligible 29. Criteria. The revolving fund mechanism and
expenditures (including cases in which it is the report-based withdrawal procedure are
subsequently determined that an expenditure preferably used for large projects that, in IFAD’s
was not eligible), it will require the B/R to assessment, possess adequate FM and internal
refund the amount. In serious cases, this can control systems. Specifically, report-based
provide the basis for suspension in accordance withdrawals should only be used where FMA
with GC section 12.01(xxi). of the country is positive and the project has
established:
26. It is to be noted that annual project audit fees
are an eligible expenditure. (a) A sound FM system, including reliable
budget monitoring and financial reporting
27. Report-based withdrawal. In some cases, IFAD
functions;
and the B/R may agree to use the financial
monitoring system to advance financing (b) An adequate procurement monitoring and
proceeds to the DA. Typically, this reporting reporting system;
system is used in cases of cofinancing with (c) An effective M&E system that provides
institutions that have agreed with the B/R reliable data/reports on project activities
to adopt this system. In these cases, the B/R and outputs, with a linkage to cost data.
submits advance WAs for replenishment of
the DA, supported by a financial monitoring 30. Monitoring. Under the report-based withdrawal
reporting (FMR) package. While tailored to the procedure, IFAD does not review the supporting
specificities of each project, this package usually documents for each expenditure prior to the
contains the following information for the issuance of a disbursement authorization.
reporting period: Instead, withdrawals from the loan and/or
grant accounts are authorized on the basis of
(a) The FMR, which comprises: (i) a financial the information provided by the B/R in the
report (statement of cash balances, FMR package at the end of each quarter. This
sources and uses of funds by expense information is subsequently verified by IFAD
category, budget-to-actual statement); (ii) a during its supervision missions and through
procurement report (implementation status the independent audits conducted annually.
of the procurement plan and summary The procurement plan and its implementation
of key procurement issues); and (iii) a should also be an essential reference in
physical progress report (implementation establishing the amount to be disbursed.
status of the AWP/B, linking physical
outputs to financial execution);
(b) The DA activity statement (and related
bank statements), which includes:
(i) reconciliation of the DA for the period;
(ii) a schedule of cumulative advances
received in and expenditures made from
the DA; and (iii) forecast expenditures for
the following two reporting periods;

90
H.5 Designated account
31. DA modalities. There are two modalities for (d) If funds advanced under the revolving fund
managing advances to the DA, summarized modality remain un-/underused, amounts
below, and for which detailed guidance is in the account could be significantly high
provided: and could include amounts unspent from
lapsed budget periods. This may expose
(a) Imprest account. In this method, an initial
IFAD to additional risks of unrecovered
amount is advanced to the DA, which is
advances at the time of closure. This would
then replenished periodically based on
also impose avoidable financing costs on
documentation submitted to justify the
the borrower.
advance. The maximum advance is stated as
an AA. The FO may vary this ceiling during (e) If funds are intended to be disbursed/
project implementation if necessary, in spent at multiple spending locations,
consultation with the CPM. Such variations including decentralized ones, obtaining
must be effected through an amendment to SOEs and documents for justification from
the LtB/R. all locations may be time-consuming. In
such cases, the revolving fund method
(b) Revolving fund. In this method, an amount
may offer the borrower more flexibility in
is advanced to the DA and is based on a
maintaining a smooth flow of funds to the
forecast of expenditures for a period of 4-12
project.
months (excluding anticipated SCs or direct
payments), as defined in the LtB/R. The 33. Banking arrangements. GC section 4.04(d)
forecast should be determined based on states that “The Fund may place reasonable
the AWP/B and the procurement plan: the limits on the amount that the Borrower/
AWP/B should include a cash forecast that Recipient may withdraw in advance or the
shows the different sources of funds and overall balance of such advance withdrawals,
can be correlated with schedule 2 of the FA. and may require that such amounts be held in a
The FMA done in the design phase should freely convertible currency and/or be held in an
also be taken into consideration. account designated for that purpose ….”
32. To determine the most appropriate modality, 34. IFAD may require that amounts withdrawn by
FOs will consider aspects of project design, the B/R in advance be held in a DA. It may put
including the number of implementing limits on the amounts disbursed into the DA
agencies, flow of funds arrangements, and may require that the DA be denominated in
expenditure rate and FM risks. Factors to a freely convertible currency.
consider include:
35. As GC section 4.04(d) states that IFAD ‘may
(a) The revolving fund modality may be require’ the use of a DA, as quoted above, this
considered where the overall FM risk is is an obligation that can be imposed by IFAD
assessed as low. at any time during disbursement of financing.
GC section 7.02(b) provides that the DA may
(b) It would not be appropriate, in particular,
be mentioned in the FA, but it is preferable
when the AWP/B process is not very reliable
not to do so, as any changes in DA modalities
or is unpredictable.
would require an amendment to the agreement.
(c) Under this modality, restrictions on the use Instead, these issues are usually addressed in the
of funds for specific expenditure categories LtB/R after discussion during negotiations.
are often not feasible, as advances and
replenishments are directly linked to the
AWP/B and ex ante scrutiny is not effective.

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36. In accordance with the B/R’s regulations, the DA detail to document eligible transactions
should normally be an interest-bearing account, satisfactorily; and open letters of credit if these
provided the funds remain readily available to are required for efficient project execution.
meet expenditures as these are incurred. The B/R The bank should be reputable and in sound
should account for interest earned and report on financial condition, in order to ensure that DA
its use. The use of interest to cover project costs funds are secure. If the account is held with a
is encouraged, particularly if the B/R has any commercial bank, the B/R should verify that
difficulty making counterpart funds available to bank charges are reasonable. These charges are
the project. eligible expenditures under project financing.

37. Currency of the DA. Generally, the DA is 41. Prefinanced expenditure. In cases in which all
opened in a freely convertible currency, e.g. US$/ project expenditures can be readily financed
EUR. If the source financing is denominated in by the B/R using its own resources, to be
a specific convertible currency, it is advisable subsequently reimbursed by IFAD, a DA is not
to open the DA in the same currency as the necessary.
commitment (e.g. the STF DA opened in EUR or 42. The use of a DA is not intended to provide the
cases of single currency lending). While the DA Fund with any protection: the B/R must use
may be opened in other currencies if required by the proceeds of the financing only for eligible
the B/R, this must be done in consultation with expenditures, and the failure to do so gives
the FO and CPM – and after confirming with the Fund the ability to suspend or cancel the
TRE its facility in buying those currencies. Other agreement, and to require an immediate refund
factors determining the choice of currency are: of amounts not used for such expenditures.
risk of depreciation or volatility; designation of
the majority of the expenditures; and reporting 43. Pooled or segregated DAs. An important
currency. The exchange rate risk is always to the distinction must be made between cases in
account of the B/R. which the B/R chooses to keep the funds in a
segregated account and/or to maintain them in
38. The FO will decide the need for a segregated DA a particular currency, and cases in which IFAD
after completion of design-phase FMA, and this imposes such requirements. If this is a unilateral
decision should be documented in the PDR. decision of the B/R, there is no need to make
When a DA is required, this should also be any reference to it in the FA. The B/R simply
stated in the FA. The operational aspects of the instructs the Fund where to send the money,
DA and the AA should be documented in the and maintains the account in accordance with
LtB/R. its own procedures. There may be cases in which
39. The obligation of maintaining a DA should only the B/R, for its own legal, administrative or
be imposed when a determination has been other reasons, requests that the requirement to
made that the B/R has adequate accounting hold the funds in a DA is set out in the FA or in
and control systems in place to manage these the minutes of the negotiations. In general, this
financing proceeds in the ordinary course of request can be granted.
business. The obligation to maintain the DA 44. If IFAD requires the use of a DA for all funds
in a freely convertible currency should only withdrawn in advance, then the B/R obviously
be imposed when the CPM and FO have cannot make cash withdrawals until that
determined that there is a danger that the account has been opened, but it can still instruct
national currency will undergo significant IFAD to pay suppliers directly or to issue SCs.
depreciation. For this reason, opening of a DA should not be
40 The DA may be held in a commercial bank or made a general condition of disbursement.
the central bank. The B/R is responsible for 45. Where the B/R’s accounting system permits, and
selection of the institution and, accordingly, is robust, pooling of the DA (i.e. a single DA) is
bears all risk. The selected bank where the DA encouraged when there are multiple financing
account has been opened must be in a position sources administered by IFAD (e.g. IFAD loan,
to: execute a large number of payments in a IFAD grant, ASAP, GEF). The advantages of such
variety of currencies and without delay; issue an arrangement would be:
regular monthly bank statements in sufficient

92
(a) Only one overall WA would be required (e) SOEs must be separated for each financing
for the DA at each replenishment request, source or must show the share percentage
rather than multiple ones per financing in the common SOE, so that the WA
source each time. amount can be traced to its SOE.
(b) Project banking arrangements would be 47. Pooling of IFAD funds into the DA may be
simplified. considered and encouraged as a means to
simplify accounting and reduce the volume of
(c) At the time of financing closure, it is easier
WAs. Staff should consider opening just one
to ensure full utilization and/or refunds
DA for all financing sources administered by
with respect to unused funds from any one
the Fund if the entity managing the DA has the
financing source.
capacity to track and report on sources and uses
46. The following guidelines/examples are provided of funds. One should consider pooling when
to implement DA pooling arrangements: the DA is only a conduit to transfer funds into a
(a) The currency of the DA must be feasible for pooled local currency project account.
all financing sources in the pool and agreed 48. Refunds. GC section 4.09 provides, “If the Fund
with the B/R. determines that any amount withdrawn from
(b) AAs for the DA should be notionally the Loan and/or Grant Accounts was not used
attributed to each financing source for for the purposes indicated or will not be needed
loan/grant accounting purposes. For thereafter to finance Eligible Expenditures,
example, if the financing mix is IFAD loan the Borrower/Recipient shall promptly refund
(US$9 million) and ASAP (US$1 million), such amount to the Fund upon instruction by
then the overall AA of, say, US$2 million, the Fund. Except as the Fund shall otherwise
should be attributed: US$1.8 million to agree, such refund shall be made in the currency
the IFAD loan and US$0.2 million to ASAP, used by the Fund to disburse such withdrawal.
roughly in proportion to the financing The Fund shall credit the Loan and/or Grant
mix. This attribution will be required Accounts by the SDR Equivalent of the amount
for loan administration and accounting, so refunded.”
and to ensure that, at closing, the unused 49. The B/R is required to provide refunds if:
advance balances are correctly attributed
(a) Amounts withdrawn in advance (whether
to the financing source. This split of the AA
or not held in a DA) are not required to
should be stated in the LtB/R.
meet further project expenditures;
(c) Control over ‘which-source-pays-for-what-
(b) A contract or other expenditure included in
expenditure’ will move to the accounting
a WA and paid for by IFAD is subsequently
system, not the bank account. Project
determined to be ineligible; this situation
accounting software should be able to
may arise when SOEs are used (see
record each amount that the B/R receives
section H.9), or when contracts fall below
in the DA against the respective financing
the prior-review threshold and contract
source and book expenditures accordingly.
award procedures are examined during
So each financing source will be a
a supervision mission; or during the
separate ledger account, not a
course of an annual external audit or
separate bank account.
investigation; or
(d) Withdrawal applications: a combined WA
(c) A disbursement error leads to payment
(advance or replenishment) for several
of an incorrect amount or currency, or
financing sources will be accepted, but it
payment to an improper beneficiary.
should state separately the amount being
justified for each source. The bank account 50. In practice, time allowed for receipt by IFAD of
given for each will, of course, be the same. refunds is usually no more than 90 days, unless
prior approval has been provided by the AVP,
FOD, allowing for up to 120 days.

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51. Treatment of refunds. When FMD and/or zero as possible. The B/R should be
ACD determine that a refund is required, a notified of the procedures to be applied
notice, cleared by the CPM and signed by the during the remainder of the project
Director, FMD, is sent to the B/R giving details implementation period.
of the amounts to be refunded and providing 54. During a period of full suspension of
instructions on how the payment should disbursements (see section H.10), no
be made: replenishments are made to the DA. However,
(a) For all financing, refunds must be received the B/R may continue to use the amounts
in the same currency as the original already received in advance, whether in the DA
disbursement. To ensure that the amount or elsewhere, to meet eligible expenditures.
received completely offsets the balance Submission of applications documenting these
in the advance account, the applicable expenditures should continue on a regular basis.
exchange rate for conversion will be that Once the suspension is lifted, IFAD may agree
of the original disbursement. It should to make further disbursements so as to restore
be noted that the credit value date for the advance account to the ceiling amount.
calculation of outstanding interest will be Where disbursements are partially suspended,
the value date the funds are received in only those expenditures related to components
IFAD’s bank account. or project entities not affected by the suspension
are eligible for replenishment.
(b) Where the B/R fails to provide refunds,
suspension procedures in accordance with 55. Misuse of DA funds is rare when the B/R has
GC section 12.01(a)(ii) are applied. adequate control measures in place. If funds
are misused due to inadequate controls or a
52. Early recovery of advance. For some projects,
misinterpretation of the eligibility criteria, IFAD
expenditure levels peak in the middle of project
promptly notifies the B/R of any amount that
implementation periods. Recovery of the
must be refunded or justified (through evidence
advance should begin when the undisbursed
of other eligible expenditures financed from
balance of the financing (including outstanding
the B/R’s own resources). Further advances
SCs) is equal to twice the amount of the
may be withheld until the refund has been
advance. To allow for a smooth transition,
made or until appropriate documentation on
decreased advances to recover excess advances
other eligible expenditures has been submitted.
are initiated by the FO and CPM when the
While this remedy may be applied with some
forecast expenditure starts to decline. To ensure
flexibility (e.g. the eligible portion of an
that funds are available to finance eligible
application may be replenished at the moment
expenditures still to be incurred, a gradual
that the refund notice is sent), repeated misuse
recovery of the advance is recommended – by
or delays in effecting the refund may result in
applying part of the amount documented in
withholding the processing of further advances
each replenishment application to reduce the
until the DA has been restored to its
outstanding advance. The recovery ratio for
proper level.
subsequent applications may then be increased
to ensure that recovery is completed before 56. In addition to routinely reviewing advance
the financing closing date. In this manner, WAs, the CPM and FO should also monitor
outstanding advances are adjusted and will not DA activity. Special attention should be paid
be excessive compared with actual needs. This to any DAs for which there have been no
may normally be necessary only once or twice replenishment applications in the previous six
during the entire project period, and the B/R is months and to those for which the outstanding
notified of these adjustments. advance is substantially greater than the
cumulative expenditure flow through the
53. One year before the project completion date,
account over a six-month period.
the CPM and FO review the status of the DA
to decide whether additional advances into
the account are to be suspended or reduced to
ensure that the amount to be refunded by the
B/R at the financing closing date is as close to

94
H.6 Reimbursements
57. Reimbursement procedures apply when the B/R the same way as for replenishment WAs. The B/R
has prefinanced expenditures that are otherwise is not authorized to directly transfer these funds
eligible for financing under the FA and seeks re- from the project DA. All such reimbursements
imbursement from the financing. The normal are subject to validation and authorization of
WA (form 100) can be used to seek withdrawal the WA by ACD. Remittance may be made by
of funds from the loan/grant, up to a maximum IFAD to the B/R’s treasury or to authorized proj-
of six months after incurring the expenditure. ect accounts that have been set up for counter-
The WA must clearly indicate that the WA is for part funds. All reimbursements must be in the
‘reimbursement’ and the B/R authorized bank currency in which the expenditure was incurred,
account where funds are to be sent. Supporting as shown in the supporting documents attached
documents such as SOEs should be submitted in to the WA.

H.7 Direct payments


58. A WA may instruct IFAD to pay a supplier 59. The use of this method of disbursement is
directly. In this case, the WA must identify the limited to exceptional cases of very large
date on which payment becomes due to the payments, or where the contracts are complex
supplier. This procedure is generally suitable for and more risk-prone and the underlying
high-value payments for large civil works, large supporting documentation requires review
consultant fees and importation of goods for prior to direct disbursement. FOs should
which the use of a letter of credit is not practical. continuously review project expenditure
A separate WA should be filled out for each patterns and revise the direct payment level
supplier and currency in which the payment is where necessary to ensure that projects are
requested. Applications for direct payment must encouraged to use the DA for all or most
reach IFAD no less than two weeks before the payments. To reduce volumes of direct
payment to the supplier becomes due. Detailed payments and the frequency of WAs in general,
procedures for submission of WAs for direct it is critical that projects have enough advance
payments are specified in the LDH, and ACD funds in the DA. To facilitate this, staff should
procedural requirements are provided in monitor liquidity in DAs regularly. A minimum
exhibit H-2 Risk-based disbursement guidelines value threshold for direct payments should be
(ex-ante). specified by FMD staff and inserted in the LtB/R.

H.8 Special commitments5


60. GC section 4.03 provides, “Upon the Borrower/ 61. The SC procedure is used to finance imports
Recipient’s request, the Fund may agree to make of goods under a letter of credit. A commercial
an irrevocable commitment to pay amounts letter of credit is a mode of payment frequently
necessary to guarantee a Letter of Credit used used in making payments to a foreign supplier.
to finance Eligible Expenditures (a ‘Special IFAD does not open commercial letters of
Commitment’) on such terms and conditions credit for the benefit of a B/R. Instead, it makes
as the Borrower/Recipient and the Fund may a commitment to guarantee a letter of credit
agree.” issued by a bank for the B/R.

5 The SC procedure was available to borrowers for financing imports of goods under a letter of credit, for which the Fund makes
a commitment to guarantee the letter issued by a bank for the B/R. This procedure should no longer be offered to borrowers for new
projects unless, following thorough review, no alternative mechanisms are possible.

Module H
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62. Under an SC, IFAD agrees to pay the negotiating available for withdrawal in the loan/grant
bank (on behalf of the B/R and from the loan/ account. There is no charge for issuance. The
grant account) for the latter’s payments made detailed B/R procedures for SCs are set out in
or to be made to the supplier, under and in the LDH, and ACD procedural requirements are
accordance with the terms of a specified letter provided in exhibit H-2 Risk-based disbursement
of credit. The Fund’s obligation is irrevocable guidelines (ex-ante). Going forward, in practice,
and is not affected by suspension or cancellation IFAD will no longer approve SC arrangements
of the financing. Thus, until it is cancelled, the owing to considerations of efficiency and the
amount of the SC is deducted from the amount need to develop system customizations to
accommodate SCs.

H.9 Processing disbursements


63. ACD receives WAs in one of two ways: by direct of the correct procedure and forms, signatures
input through the ICP, or via soft copy/hard of authorized representatives, completeness of
copy sent by the B/R directly to ACD. Soft-copy/ forms, accuracy of computations, compliance
hard-copy WAs are manually inserted into with LtB/R and LDH requirements, adequacy
the ICP and a finance assistant uploads the of supporting documents, SOE eligibility and
supporting documentation into the system. ACD certification, and correctness of the financing
follows a paperless processing policy, by which percentage as described in exhibit H-3 Smart
all reviews are performed on soft copy. SOE forms. The availability of funds in the loan
and/or grant accounts and allocated categories
64. Review responsibilities. ACD has overall
are also verified.
responsibility and accountability for the
approval of WAs. The initial review is performed 67. WAs requiring CPM review6 are submitted to the
systematically by the ICP, which runs a series CPM for endorsement of both procurement and
of predetermined validations based on the AWP/B aspects before final approval by the DO
type of disbursement indicated in the input of and transmission of a payment instruction to
the B/R. The WA is ‘navigated’ through the ICP TRE for processing.
based on a set of parameters that recognize the
68. Projects following the report-based
authorization requirements, fiduciary risk rating
disbursement procedure require confirmation
and size/materiality of the withdrawal amount.
that the FMR package has been satisfactorily
These validations direct the WA to one of three
received before the WA can be processed for
routings:
disbursement. The FO provides confirmation
Routing 1: Validation by finance assistant, on whether the FMR package has been received
certification by CPM and approval by or is still pending through an automatic
disbursement officer (DO); interface between the FMDB and the ICP.
The information is made available to the
Routing 2: Validation by finance assistant and
finance assistant during the disbursement
approval by DO; and
procedure, before final approval by the DO and
Routing 3: ‘Straight-through processing’. transmission of a payment instruction to TRE
65. WAs that trigger validation warnings/errors for processing.
within the system are automatically directed 69. A limited selection of WAs may be eligible
to routing 1, for manual validation by a for straight-through processing. Eligibility is
finance assistant. determined by the FO and controlled through
66. In accordance with the report-based an interface between the FMDB and the ICP. By
disbursement procedure, finance assistants verify providing instructions in the FMDB, the FO can
WAs for overall completeness and accuracy, use direct eligibility for straight-through processing
at the account level.

6 WAs relating to low-risk replenishments, reimbursements and justifications do not require CPM endorsement. In these cases,
DO approval is sufficient to trigger the transmission of a payment instruction to TRE. All other types of WAs, including low-risk
advances and direct payments, require CPM endorsement (may be subject to change).
96
70. Detailed minimum verification steps are laid (g) In the event that disbursements have been
out in the WA checklist in exhibit H-2 Risk-based suspended, the items fall within the list of
disbursement guidelines (ex-ante). Apart from exemptions.
these minimum steps to review the correctness
72. If a withdrawal application number has already
and completeness of WAs, the following checks
been used, or a message number (if required) is
may be applied on a random basis:
missing or duplicated, the ACD or ICP system
(a) Ensure that forms are used as prescribed will lead to rejection of the WA.
in the LDH and have been duly signed. As
73. ACD will also apply initial reviews of WA
SOEs are just supporting documents, the
submissions and may hold or reject the WA for
signature of the head of the PIU will suffice.
issues that may include, but not be limited to,
However, WA form 100 must be signed by
the incoming message being garbled or illegible
the authorized signatories;
to the extent that the amount or the payment
(b) Where a category is overdrawn, review the instructions are unclear, or the supporting
latest status of the reallocation approval documentation is not sufficient.
process, with follow-up as appropriate;
74. All original documents (WAs and payment
(c) For payments in local currency made from approvals) are retained and filed by ADM in line
the DA, check the reasonableness of the with IFAD’s document retention policies (see
exchange rates applied; module N, section N.1), as they are supporting
documentation for the final closure of the loan
(d) Ensure that direct payments are not
and/or grant accounts and future debt recovery/
made to bank accounts of individuals
servicing.
(only companies/institutions), except for
payment to an individual consultant; 75. Payment authorization. For projects directly
supervised by IFAD, the DO approves WAs and
(e) Ensure that advances claimed for
the payment order is sent to the treasury officer
reimbursement are duly justified.
for remittance, which is normally processed via
Unjustified claims should be rejected;
SWIFT transfer.
(f) Ensure that form 100 is signed in the
76. For projects supervised by a CI, that
original or online approval provided
organization sends a payment instruction to
through the ICP.
IFAD. Several applications may be grouped into
71. In the case of submission by hard copy from the a single payment instruction, provided that the
project, the ACD finance assistant is responsible currency and beneficiary are the same. Each
for entering WA data into the ICP after payment instruction includes the following
verification that: elements:
(a) The financing is effective; (a) IFAD’s loan and/or grant number and
(b) There are no pending unsatisfied project name;
conditions precedent to withdrawal related (b) Application number, currency and
to the withdrawal category(ies). total amount;
(c) Available financing funds are sufficient; (c) Total amount approved for payment
(d) Sufficient funds remain in the relevant by IFAD;
withdrawal category(ies), or justification (d) Amount related to each withdrawal
has been given for an overdraft; category and supplying country;
(e) Replenishment amounts are within the (e) Complete payment instructions, including
maximum amount that can be withdrawn name and address of payee’s bank and
in advance (specified in the FA); beneficiary’s account number, name
(f) The financing closing date has not been and address;
reached, or the WA payment approval has
been received within an extended period
for submission of applications (module F,
section F.4);

Module H
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(f) A meaningful payment reference, to be (c) External-audit-report review findings;
cited by payee bank to the payee, for (d) Complaints brought to IFAD’s attention of
example loan, grant and application fraud and corruption in projects; and
numbers for a reimbursement application,
or contract and invoice numbers for direct (e) Findings from field-mission checks.
payment to a supplier; and 82. In addition, the FO’s professional judgement,
(g) SC number, if applicable. based on knowledge of the specific project and
advice of the CPM, if any, will determine the
77. The exclusion of any of the above items could PFR risk rating. This in turn will determine the
lead to payment delays while IFAD asks the type and frequency of ex ante checks of the WAs,
CI to seek additional information from project to be carried out by ACD, and which are based
authorities. on the PFR rating (high/medium/low), taking
78. Risk-based disbursements. IFAD follows a risk- WA characteristics into account. The level and
based approach to approval of payments. Based detail of ex ante checks are specified in exhibit
on assessment of the risk level of the project or H-3. Such checks may be enhanced or reduced
type of disbursement concerned, WAs may be where deemed necessary.
submitted to different levels of control and ex 83. Disbursements for low-risk project WAs will
ante or ex post reviews (see exhibit H-1 Risk- generally follow a ‘funds flow’ principle,
based disbursement guidelines (ex-post)). Detailed rather than a point of control of underlying
checklist procedures for ex ante WA processing expenditures. This contributes to the
using the guidelines are provided in exhibit H-2 achievement of efficiencies through accelerated
Risk-based disbursement guidelines (ex-ante), and or fast-track disbursements, including the
the following risk-based procedures are applied. possibility of straight-through processing. This
79. In the project design phase, disbursement approach relies on regular, periodic in-country
arrangements should take into consideration checks by an FO or FMS and regular review
the documented fiduciary risks and risk of audit reports by FOs. Where this is not the
mitigation measures that have been agreed and case, it may jeopardize the ability to accelerate
covenanted. Disbursement arrangements should disbursements.
be agreed with the B/R and recorded in the legal 84. Where inconsistencies are found in performing
agreements or LtB/R. the WA review, action should be taken
80. The FO is responsible for designing and accordingly, depending on its nature (i.e.
monitoring disbursement arrangements. Thus transactional vs. systemic). Transactional
s/he should monitor projects on a continuous remedies include correcting inconsistencies,
basis to establish whether it remains appropriate requesting resubmission or rejecting a WA.
to disburse funds to a project under existing Project-level systemic remedies may include
arrangements. The FO receives systematic changing disbursement arrangements and/or
notifications of disbursement-related activities.7 documentation for the future and requesting
additional risk mitigation measures in project
81. In making this judgement, the FO places
FM. Generally, transactional remedies would
explicit reliance primarily on:
be the responsibility of finance assistants, and
(a) Quality of WAs – WA characteristics refer systemic remedies of FOs.
to the payment type (initial deposit,
85. Each FA identifies the designated representative
replenishment to an DA, direct payment,
of the B/R. WAs must be signed by the person
reimbursement and SC), amount and
holding this position, or someone who has
timing of the WA to be processed;
been authorized by that person. The LtB/R
(b) Monitoring of the actual disbursement includes a request to the B/R to provide
performance and trends during evidence of the authority of persons authorized
implementation; to sign WAs and their specimen signatures,

7 The ICP sends automatic notifications to the CPM, FO and DO(s) for information only – even when formal approval is not
required – of key disbursement-related activities, including: submission of a new WA by project authorities, payment by TRE, or
rejection of a WA and its return to project authorities.

98
along with a sample form. No WA can be 87. The decision to reject a WA is made by the
approved by IFAD unless it is signed by a person finance assistant and/or DO. Whenever it is
whose specimen signature has been provided in determined that a WA or part of an application
accordance with this procedure. is ineligible for financing or cannot be processed
as submitted, the finance assistant or CPM must
86. Follow-up on rejected WAs. In cases where
immediately send a notification through the
the review process described above reveals
ICP, informing the B/R that the WA cannot be
significant errors, omissions or delays in
processed by IFAD and explaining the reason(s)
providing requested documentation or other
for the rejection. The correspondence should
shortcomings in the WA submitted by the B/R,
also indicate which specific corrective action(s)
IFAD may decide to reject the WA. The most
the B/R should take (for example, submission of
common causes of rejection of WAs include:
additional supporting documents or clarification
• Absence of communication of authorized of certain issues), as well as the maximum time
signatures to IFAD; frame8 for receipt of the corrected WA by IFAD.
• Erroneous or incomplete banking 88. The finance assistant is responsible for following
instructions; up on the WA-related queries raised with the
• WA amount below the minimum threshold; B/R. The CPM and FO are always kept informed
of any issue. This follow-up is crucial to ensuring
• Non-fulfilment of all conditions precedent prompt resolution of the related issues or
to withdrawal; problems and timely processing of the WA. In
• Erroneous currency of expenditure (claim in the absence of appropriate and/or timely action,
a currency other than the contract currency despite repeated reminders, IFAD may decide
or WA in a currency other than the DA to take one of the following remedial actions,
currency); based on the context:

• Non-compliance with applicable (a) Modification of the SOE or procurement


procurement procedures; thresholds;

• Non-compliance with terms of payment of (b) Reduction of the advance ceiling allocation;
contracts; (c) Suspension of disbursements under the
• Incomplete or inadequate supporting financing;
documentation; (d) Suspension of the country portfolio;
• Non-compliance with SOE eligibility (e) Cancellation.
requirements;
89. Additional information. The finance assistant
• Claim of unjustified advances to service notifies project authorities and provides
suppliers or project staff; supplementary information in cases where:
• Incomplete description of expenditures (for (a) Part of an application has been found to be
SOEs); ineligible;
• Erroneous percentage of financing; (b) Payment of the authorized amount
• Erroneous exchange rate; will lead to an overdraft on the amount
allocated to a category;
• Computational errors;
(c) Part or all of the application is to be paid
• Non-compliance with the maximum time
only after a suspension of disbursements
allowance for resubmission of documents
has been lifted. This will be a standard
or clarifications as requested by ACD
notification to the B/R from the ICP.
(maximum two weeks).

8 Two weeks is the maximum time frame for submission of missing/incomplete documentation or clarifications where requested
by IFAD, following which a WA will be systematically rejected.

Module H
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90. Category overdrafts. When processing WAs, 93. The review process undertaken by IFAD should
ACD will process a WA if the amount overdrawn thus be sufficiently rigorous to reasonably
on an individual category is less than 30 percent safeguard against fraudulent use of funds.
of the original category allocation. ACD should Reviewers must use approved checklists to
notify the relevant FO of overdrawn categories, ensure that adequate controls have been
for active follow-up with the CPM, so that the performed prior to authorizing withdrawal of
need for a formal reallocation can be evaluated. funds.

91. When a formal reallocation is not anticipated 94. Primary controls are:
and the project completion date is imminent, (a) For payments reimbursing the B/R’s
payments on overdrawn categories will be made account: verification of authorized
on an exceptional basis, provided that: signature(s)9 and assurance that approval
(a) They occur within six months prior to the of the WA payment is appropriate;
project completion date; or (b) For payments into a DA: verification of
(b) The undisbursed balance of the loan is less authorized signature(s) and assurance that
than 10 per cent of the loan amount. In this the payment instructions are consistent
case, unless an extension of the completion with the hard-copy evidence submitted
date is envisaged, no formal reallocation when the account was opened;
should be made and the disbursements (c) For payments against a special
for eligible expenditures will continue commitment: verification that the payment
up to the closing date or until the total request has been submitted by the
drawdown of the loan amount. commercial bank holding IFAD’s SC; and
92. Safeguarding against fraud. In accordance with (d) For direct payments to the suppliers
provisions of the IFAD Policy on Preventing of goods and services: verification of
Fraud and Corruption in its Activities and authorized signature(s), monitoring of
Operations (December 2005), IFAD applies procurement eligibility and verification
a zero-tolerance policy with regard to any that the supporting documents submitted
fraudulent, corrupt, collusive or coercive actions with the application justify the payment
in the projects it finances. This entails not only to the designated beneficiary. Payments
pursuing all allegations of fraudulent practices to individual bank accounts should not
and applying appropriate sanctions, but also be allowed, except for payment to an
promoting preventive control measures such individual consultant.
as assessments of national and project-specific
FM, auditing and procurement systems during
the project design phase. During project
implementation, the review process applied
to each WA by PMD and ACD staff prior to
authorizing disbursements constitutes one
of the main controls over the proper use of
financing proceeds.

9 Verification of authorized signature(s) must always be performed against the original hard copy.

100
H.10 Processing disbursements
during suspension
95. The various grounds for suspension, in • Payments related to contracts signed
accordance with GC section 12, as well as before the suspension date for the
related procedures are outlined in section E.8 supply of goods shipped or delivered,
‘Grounds for Suspension of Withdrawals’. or for works performed, or for any
expenditures made on or before the
96. Exemptions from suspension
suspension date, provided the relevant
(i) Payments under SCs are not affected by applications are received by a specified
suspension of disbursements as long as the date, normally not more than 90 days
underlying letter of credit remains valid. after the suspension date.
(ii) When assessing exemptions from 97. Processing of WAs during suspension.
suspension, the CPMT must balance IFAD reviews all WAs to determine whether
IFAD’s fiduciary safeguards with the the claimed amounts fall within the list
possible disruptive impact on project of exemptions. If that is the case, the WA
implementation. If the cause of suspension payment approval indicates the amounts
was due to fraud, then the list of eligible for payment despite the suspension
exemptions would be kept very short in and the amounts to be paid by IFAD once the
order to avoid situations in which the suspension is lifted. Otherwise, the WA is kept
suspension would have little practical effect pending until the suspension is lifted, or is used
in limiting IFAD’s exposure and would to justify outstanding advances.
give little additional incentive to the B/R to
98. The B/R may continue to incur expenditure
come back into compliance. On the other
during a period of suspension, which if
hand, if the project’s suspension is triggered
in the event the suspension is lifted, may
by an unjustified obligation, IFAD normally
be reimbursed by the Fund provided the
exempts a number of items when it
expenditure is in line with IFAD’s eligibility
suspends disbursements. These exemptions
requirements as outlined in GC section 4.08.
are granted so as to avoid undue disruption
of project implementation and, to the
extent possible, to avoid causing harm to
innocent third parties. The items normally
exempted are:
– Claims for payment from commercial
banks holding SCs, guarantees,
qualified agreements to reimburse, or
qualified commitments issued by IFAD
prior to the suspension date;
– Payments to consultants and staff
where an interruption would cause
personal hardship or disrupt critical
work; essential office expenses –
exempted only in so far as they are
limited to a specific, limited period,
not normally exceeding six months,
and should be subject to review at
least once each quarter;

Module H
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102
FINANCIAL REPORTING AND AUDITING
REQUIREMENTS MODULE I
Module I
Financial reporting and auditing requirements
• I.1 Applicability
• I.2 Roles and responsibilities
• I.3 Financial reporting
• I.4 Auditing

104
I.1 Applicability
1. Module I is applicable to Investment Projects 2. Where supervision arrangements are in
that are subject to IFAD’s General Conditions place with a Cooperating Institution (CI),
for Agricultural Development Financing and IFAD will assess the CI financial reporting
is based on the principles outlined in the and audit arrangements and recommend
Conceptual Framework for Financial Reporting measures to ensure adequacy and alignment
and Auditing of IFAD-financed Projects with the Handbook.
(the “Framework”) (exhibit I-1). Further
guidance on operational aspects intended for
IFAD B/Rs and other external stakeholders is
provided in the IFAD Handbook on Financial
Reporting and Auditing of IFAD-financed
projects (the “Handbook”) (exhibit I-2).

I.2 Roles and responsibilities


3. The primary responsibility for FM arrangements, (b) Monitoring use of funds, through review
including financial reporting and auditing, lies of interim and annual financial reports,
with the B/R. In line with Article 7 Section 1 (c) review of project audit reports; and
of The Agreement Establishing IFAD, the Fund (c) Implementation support and supervision
also has a fiduciary responsibility to “make missions, through technical training and
arrangements to ensure that the proceeds of follow-up on agreed action plans. See also
any financing are used only for the purposes Module D.2 Responsibilities and Roles
for which the financing was provided, with of FMD Staff.
due attention to considerations of economy,
efficiency and social equity.” In the context
of financial reporting and auditing, this
responsibility includes:
(a) Understanding the fiduciary risk
environment, through assessing the
acceptability of proposed financial
reporting and audit arrangements,
assessment of accounting and auditing
standards, and proposal of mitigation
arrangements as appropriate;

Module
ModuleAI 105
I.3 Financial reporting
4. Selection of acceptable accounting standards. (c) National/Regional accounting standards are
acceptable if deemed appropriate by IFAD.
(a) B/Rs are required to prepare annual
Acceptability of the accounting standards
financial statements in accordance with
is assessed on a case by case basis during
acceptable accounting standards. The
the Project design phase, following which
accounting standards may follow either
confirmation, or otherwise, on the use
an accrual or cash basis of accounting as
thereof is documented in the detailed
outlined below:
design report. Exhibit I-3 provides
Table 1: Summary of acceptable additional guidance on how to assess
accounting standards national/regional accounting standards.

Accrual Cash 5. Annual financial statements.


basis basis
(a) B/Rs are required to submit annual
IPSASa ü financial statements which include the
IPSAS Financial Reporting minimum prescribed disclosures as
under the cash basis of ü outlined in table 2.
accountingb
IFRSc ü
National/Regional
Accounting Standards if
deemed acceptable by ü ü
the Fund
a
As issued by the International Public Sector
Accounting Standards Board (IPSAS-B).
b
https://www.iaasb.org/system/files/publications/
files/IPSASB-2016-Handbook-Volume-2.pdf.
c
IFRS refers to International Financial Reporting
Standards issued by the IASB after 2001, and
International Accounting Standards that are still
relevant and were issued before 2001 by the
International Accounting Standards Committee
(IASC).

(b) B/Rs are encouraged to select standards


that are most appropriate to reflect its
operations. The standards adopted should
be specified in the notes to the audited
financial statements.

106
Table 2: Minimum prescribed content of annual financial statements

Accrual Cash
Project financial statement
basis basis
Section A: Disclosures as prescribed by accounting standardsa
1. Statement of financial position (balance sheet) ü
2. Statement of financial performance/profit or loss (income statement) ü
3. Statement of changes in net assets/equity ü
4. Cash flow statement ü
5. Comparison of budget and actual amountsb ü ü
Notes, comprising a summary of significant accounting policies and other
6.
explanatory notes ü ü
7. Statement of cash receipts and payments ü
Section B: IFAD-specific disclosures provided as supplementary information c

8. Fixed asset scheduled ü ü


9. Withdrawal application/SOEs statement ü ü
10. Sources and uses of funds statement ü ü
11. Designated account statement and reconciliation ü ü
a Refer to selected accounting standards for illustrative disclosures (e.g. IFRS, IPSAS).
b Presented as a separate statement or as budget column in the financial statement. Cash basis financial statements –
may include as column in the statement of cash receipts and payments.
c Refer to Annex 1, 2 and 3 of the Handbook for illustrative disclosures.
d Fixed asset disclosure is not specifically required under the cash basis of accounting. It is requested that disclosure
be made for IFAD purposes where the cash basis of accounting is followed. Provide summary list of fixed assets
including movement in period and prior year comparatives in the financial reports. A detailed list (description, cost,
date of purchase, location of use) should be available for audit as required.

(b) B/Rs are required to deliver unaudited1 (d) Where a Project is implemented by
Project-specific financial statements several implementing units (within a
annually, within four (4) months of the single entity), as a general principle, the
financial year-end, for the duration of the main implementing unit should prepare
implementation period (GC Section 9.02). a consolidated financial statement.
Earlier submission should be encouraged Exceptions will be considered on a case-
to accelerate the audit process, at least by-case basis.
within three months.
(e) If in-kind contributions and/or counterpart
(c) The financial reporting period will be funding (usually from beneficiaries and/
determined in consultation with the B/R or the government) are specified in the
and is generally a period of twelve (12) financing agreement, the B/R is required
months which is expected to coincide with to make disclosure thereof in its annual
the B/R‘s financial year unless otherwise project financial statements. The B/R is
agreed with IFAD.2 required to measure these contributions
in line with a pre-defined methodology
and retain all related calculations/
documentation for verification during
supervision missions and the audit process.

1 All Project financing sources, (namely IFAD Financing, counterpart contributions, beneficiaries cash contribution, co-financier
funds whether provided in cash or in the form of tax exemption) and in-kind contributions, must be duly valued and accounted for
in the Project financial statements. Start-up costs and expenditures incurred from retroactive financing must be accounted for and
included in the first set of aggregate financial statements (where applicable)
2 Refer to paragraph 18 for auditing reporting period for exceptions.

Module
ModuleAI 107
6. Interim financial reports (IFRs) and ii. Discloses the opening cash balances,
report-based disbursements. cash inflows, cash outflows and
closing cash balances;3
(a) B/Rs are required to submit unaudited IFRs
to IFAD with a frequency as agreed, to be iii. Discloses the forecast per financier;
submitted within 45 days of the period
iv. Discloses the forecast per funding
end. The format and content of the IFRs
instrument (loans, grants).
must be discussed with the B/R during the
project design stage and documented in 7. Where projects are administered using the
the project implementation manual and/or imprest account system, the amount of the
Letter to the Borrower as relevant. Exhibit authorized allocation can be unilaterally
I-4 provides additional guidance on IFRs, increased to accommodate cash forecasts. Such
and proposes a sample format, although a change must be communicated through a
a project may choose a different format, revision to the LTB.
subject to acceptability by IFAD. 8. Assessment of financial reporting quality.
(b) Projects utilizing the report-based FOs are encouraged to review the unaudited
disbursement mechanism are usually annual financial statements and provide written
required to submit IFRs on a quarterly basis feedback to the B/R within one month of receipt
in accordance with the format agreed with thereof. The feedback should be focussed on
IFAD in advance. In addition, projects must the quality of the financial reporting with
provide a cash flow forecast, which: the expectation that the B/R will remedy any
shortcomings prior to the submission of the
i. Provides a forecast for the subsequent
audited annual financial statements. Refer
quarterly reporting period;
to paragraph 23. Audit review process for
further guidance.

I.4 Auditing (b) National/Regional Standards may be


acceptable if assessed positively by IFAD.
9. Selection of acceptable auditing standards.
FOs are required to assess the acceptability
(a) IFAD requires the use of internationally of national/regional standards during the
accepted audit standards and requires that project design phase and document it in
all projects submit audit reports prepared the design report. Exhibit I-3 provides
in accordance with one of the following additional guidance on how to perform
acceptable auditing standards: this assessment.
Table 3: Summary of acceptable auditing (c) In response to identified project risks, FOs
standards for financial statement audits may determine that the audit scope should
be expanded and/or additional reporting
Public Private
auditor auditor
disclosures made. In such instances, the
following standards may be applicable and
International Standards
are considered acceptable:
of Supreme Audit ü
Institutions (ISSAI)a
i. International Standard on Related
International Standards
on Auditing (ISA)b ü Services (ISRE 4400), for agreed-
upon procedures where the auditor is
National/Regional Standards,
required to submit a report outlining
if deemed acceptable ü ü factual findings relating to the review
by the Fund
a
Issued by International Organisation of Supreme of financial information; and
Audit Institutions (INTOSAI).
b
Issued by International Federation of Accountants
(IFAC) through the International Auditing and
Assurance Standards Board (IAASB).

3 Opening and closing cash balances disclosed separately for each bank account.

108
ii. International Standard on Assurance (d) Regardless of the choice of auditor, the FO
Engagements (ISAE 3000), where is encouraged to:
the auditor is required to provide i. Perform an analysis of the status of
an Assurance Report other than a the audit profession in the country4
financial statement audit report or during the design phase, taking
factual findings report. into account convergence towards
10. Selection of the external auditor. international standards, where
applicable, and the capacity to handle
(a) The type of auditor will be determined by
IFAD projects. This should be done
IFAD prior to the conclusion of the project
with the aim of gradually increasing
design process. IFAD promotes the use of
the number of audits performed by
national systems in the implementation of
the public auditor; and
projects, as such it is preferred that public
auditors conduct the audit of IFAD funded ii. Strengthen dialogue with the public
projects where capacities and timing of auditor to build a relationship and
outputs are adequate. to identify opportunities for audit
services in the future. The FO or FMS
(b) The FO should first consider the overall
is encouraged to explore possibilities
status of the public and private auditing
for capacity-building initiatives where
professions of the country to determine
the need is identified.
whether a public auditor or private audit
firm is best placed to conduct the audit. If a 11. Auditor appointment procedure.
public auditor is not deemed suitable, IFAD (a) Where a private audit firm is procured to
must request the use of a private audit firm. conduct the audit, the B/R is responsible
The B/R is responsible for the procurement for the selection and appointment process.
of private audit services, subject to no- In accordance with international best
objection by IFAD. The FO/Project practice, the auditors should be appointed
may consider the criteria as outlined in in advance of the start of the period to be
exhibit I-5 in determining the suitability of audited to allow the auditor sufficient time
the audit firm. to plan and carry out a comprehensive
(c) The selection and use of private audit firms examination of the B/R’s financial records
does not preclude the performance of the and accounts. The appointment process in
audit by the SAI, where the SAI’s mandate table 4 should be adhered to.
requires the audit of externally funded
projects. In such cases, the FO will need to
detail the fact that SAI’s audit is acceptable
and submission to IFAD will be expected
in accordance with the SAI’s work plan. In
such cases, the private audit firm is required
to supplement the SAI and ensure timely
performance and delivery of the project
audit in accordance with IFAD’s GC. See
exhibit I-6 Guidance Note on Assessing
Capacity of SAIs.

4 Refer to exhibit I-3, table 1 and table 3 for possible sources of information to assist with assessment.

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Table 4: Private audit firm appointment process

Step Procedures Guidance/timing

In due time to allow appointment of


ü The B/R prepares TOR for the audit
(Appendix 7 of the Handbook);
auditors by the start of the financial year
Development to be audited
of auditor ü The B/R sends the TOR to IFAD (FMD)
for review and no-objection;
terms of
reference
ü IFAD communicates the “no-objection”
to the B/R on the final TOR within (30)
days of receipt.
The B/R should attempt to finalize the
ü The B/R initiates the procurement
process using the agreed TOR;
procurement process at least thirty (30) days
Procurement before the start of the financial year. The
process ü The B/R informs IFAD (CPM and FO) of
the name of proposed auditor and the
auditor should be appointed before the start
of financial year to be audited.a
procurement process followed.
The B/R representative will sign and return
ü The B/R appoints the auditor;
a copy of the engagement letter to the
Auditor ü The appointed auditor issues a formal
engagement letter.b
auditor. Although SAI standard procedures
appointment may not require issuance of an engagement
letter, FOs should encourage this as a best
practice.
a In exceptional cases and as agreed with IFAD, the appointment may take place during the financial year but should
not unduly impact the auditor’s ability to perform his duties.
b Contents to include scope of audit, prescribed responsibilities, auditing standards to be used, compliance with
ethical standards and reporting format.

(b) If a Public Auditor conducts the audit, its services should be performed at least
TOR is usually defined by law, however, once every four (4) years, to which it is
IFAD may approach the Public Auditor acceptable for the incumbent to apply. The
to request the performance of additional ongoing appointment will be considered
audit procedures, in accordance with IFAD subject to the outcome of the audit
minimum requirements. quality review process conducted by the
responsible FO. The appointments and re-
(c) Grants financed by supplementary
appointments should take place as soon
funds, including EU-funded grants, may
as possible prior to the start of the new
require specific audit procedures which
financial year.
should be incorporated into the TOR.
FOs are required to consider the EU FMG (b) FOs should be aware of country specific
(European Union Financial Management regulations related to auditor rotation,
Guide) for EU-funded grants and the especially where such regulations may
supplementary funds contribution require auditor rotation on a more frequent
agreements. A standard TOR incorporating bases than IFAD’s prescribed 4-year period.
EU-specific requirements is outlined in Where local regulations require a shorter
Appendix 7 of the Handbook. period, such requirements should be
adhered to.
12. Auditor engagement period.
(c) The auditor may only be discharged from
(a) Engagement of a private audit firm
its position subject to IFAD approval.
following the procurement process
described above, the appointment period 13. Scope of the audit. When the financial audit
may extend from one (1) year, up to, arrangements are determined during the
but not exceeding, four (4) years, subject project’s design process, the FO must take into
to satisfactory performance annually account the type and size of financing provided
as assessed by the B/R and IFAD (refer and identified FM risks. Risk factors can be
to paragraph 23 Audit review process for linked to country, institution and/or project
assessment procedure). A tender for audit characteristics. To mitigate identified risks,

110
the FO may require audits with additional develop a risk-based solution using a cost-
scope and/or agreed upon procedures to be benefit analysis.
performed. The FO should also consider the
14. FOs should consider expanding the scope of the
risks and cost implication of auditing an
audit or requesting additional reporting in the
increased number of financial statements and
following instances:

Table 5: Other types of audits/reporting

Type/
Description Audit requirements
scenario
When an IFAD project on-lends (provides Request a factual findings report:
lines of credit) to implementing agents such
as NGO’s; micro-finance institutions and local ü Test a sample of disbursements made by
the implementing agent(s) and
banks for the purposes of disbursing funds verify that funds have reach the intended
to ultimate beneficiaries, IFAD may require beneficiaries (also considering geographic
additional confirmation that the activities of location) for the purposes intended.
the implementing agents are in line with IFAD
Rural finance
facilities
requirements. ü Confirm that revolving funds are used by
implementing agent(s) in line with the terms
of the agreement between the project and
the implementing agent(s).

ü Confirm that the agreement between the


implementing agent(s) and the project are
aligned with the terms of the financing
agreement between IFAD and the Project.
The supervision mission may identify concerns Request a compliance audit to verify that:
related to a project’s procurement activities (e.g.
collusion between bidders/fraud in the contract ü The specific procurement contract was
awarded in line with an IFAD approved
Procurement award process). procurement policy; or

ü All procurement contracts awarded for the


period under review were awarded in line
with an IFAD-approved procurement policy.
Request a factual findings report which
ü When the supervision mission highlights
a concern with use of project resources,
considers:
Effectiveness - Determine if the stated
a performance audit may be considered.
This audit involves the assessment of the
üobjectives/defined goals/intended
efficiency, effectiveness and economy of an outcomes of the program/function/system
organization’s use of resources. were achieved and delivered on time.
Economy – Determine if program/function/
ü A performance audit may be required if the
Project has a significant contract with a
üsystem resources were acquired in the
third party (to deliver a system or service) appropriate quality and quantity at the right
and IFAD does not have the ability to time and place at the lowest possible cost.
assess the performance of the third party. Efficiency – Determine whether the
üprogram/function/system has increased
Performance/ productivity and reduced costs.
value-for- Notes:
money
ü Develop terms of reference based on the
specific function/program/system in line with
the above guidance.

ü SAIs may not be able to undertake


performance audits – in such instances a
private auditor should be considered.

ü Performance audits can be performed by the


internal auditors and FOs should consider
inclusion in their work program if possible.

ü Performance audits may take considerable


time (and resources) to complete. FOs should
consider the cost versus benefit of requesting
such an audit.

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Type/
Description Audit requirements
scenario
When the FO identifies the risk of non- Request a compliance audit which considers
compliance with: compliance laws, regulations, terms, etc.
Compliance ü laws/regulations; or
matters
ü the terms of a specific contract; or

ü the project implementation manual


a compliance audit may be required.
If the designated account is held with the Request a factual findings report which:
country’s treasury and the FO is concerned
Designated with the misuse of funds, a review of the flow of ü Considers the flow of funds in and out of
the designated account;
account flow funds and balance may be required.
of funds ü Provides evidence that funds have been
used in line with IFAD requirements;

ü Provides evidence as to balance as at


reporting period.

IT systems When the FO identifies significant reliance on Request an IT audit which confirms:
an IT system or has identified concerns related
to an IT system on which the project places ü Proper functioning of the IT system and
ability to provide reliable information;
reliance, an IT audit may be required.
ü Confirms existence of adequate controls
(e.g. authorised access to the system).

15. Audit terms of reference. The B/R is responsible (c) The management letter is an integral part
for the preparation of the TOR and is of the audit package which documents
encouraged to consider the outline as included internal control issues identified by
in Appendix 7 to the Handbook. The FO is auditors. The management letter should:
required to consider additional procedures/
i. Outline the auditor’s
audits which are not covered and request
recommendations to improve
the B/R to incorporate this into the TOR.
identified accounting and internal
FOs should pay specific attention to IFAD’s
control issues;
disclosure requirements (refer to paragraph 31.
Public Disclosure of project audit reports/audited ii. Include project management’s
financial statements) and ensure that the TORs responses to the identified control
incorporate this requirement. issues and their proposal to address
the issues identified; and
16. Audit package.
iii. Where applicable, follow up
(a) The auditor is expected to submit an audit
commentary on the issues identified in
package which includes, as a minimum,
the previous year’s management letter.
the audited financial statements, the audit
report and management letter. (d) In addition, any ineligible expenditures
identified during the audit must be
(b) The audit report will outline the audit
outlined in the management letter.
opinion on the audited financial statements
which will be either: 17. Audit reporting period. IFAD generally requires
an annual audit of project financial statements,
i. Unqualified – generally acceptable
in accordance with the financial year, however,
to IFAD;
the frequency with which audits are required
ii. Qualified – generally not acceptable may be changed by IFAD depending on the
to IFAD, depending on the nature of risk profile of the project. In all instances, IFAD
the qualification; will confirm the frequency with which project
financial statements should be audited.
iii. Adverse – usually not acceptable to
IFAD; or 18. The audit reporting period may be amended
for the first and/or final audits in line with the
iv. A disclaimer of opinion – usually not
following guidance:
acceptable to IFAD.

112
(a) For the first audit, where the project 21. If the B/R fails to comply with this obligation
commences during the financial year, these within 180 days from the stipulated due date
procedures will generally apply: or unsatisfactory responses are obtained,
in accordance with the terms of GC section
i. If the period between the first
12.01(b), by notice of a suspension letter
disbursement and the end of the
(exhibit I-8), the B/Rs right to request
financial year is less than six (6)
withdrawals from the loan and/or grant
months, IFAD may allow that the
accounts will be suspended.
results for the first financial period to
be included in the following financial 22. Exhibit I-9 provides an illustrative table
year audit, or; indicating various scenarios, apart from overdue
submissions, that may lead to suspension
ii. If the period between the date of the
during this monitoring process (e.g. incomplete
first disbursement and the financial
submissions, non-satisfactory responses).
year-end is greater than six (6) months
or when the level of disbursement is 23. Audit review process. The FO’s role is to carry
regarded as high, IFAD may require out timely reviews of the audit package and
audited financial statements for the assess these using appropriate risk-rating criteria
period. consistently. The main purpose of the reviews
is to determine whether the auditor conducted
(b) For the final audit, IFAD may recommend
a quality audit, and to assess the quality of the
an audit reporting period which is longer
financial reporting. The following procedures
or shorter than 12 months but not
should be performed, as a minimum, during the
exceeding 18 months. This is to ensure
review process:
that the final audit can be concluded and
the audit report submitted to IFAD by the (a) General
Project Closing Date.5 In such instances i. Ensure that the audit package is
the FO must discuss and agree to these complete and includes the audited
requirements with the B/R well in advance financial statements; audit report and
of the commencement of the final audit. management letter;
19. Monitoring compliance with finance ii. Compare the audit TOR with the
agreement covenants. Audit reports are information provided and confirm
generally due within six (6) months of the completeness;
B/R year-end. In specific cases, a different
submission period can be agreed, but the iii. Review the audit report and financial
agreement must be outlined in the FA as an statements and confirm that relevant
exception to the General Conditions. If the audit international or acceptable (as agreed
package is not received by the due date, or if with IFAD) accounting/auditing
the audit package is deemed unsatisfactory, the standards have been used; and
B/R must be notified. Where appropriate, IFAD iv. Review the financing agreement
may consider engaging an alternative auditor in and any specific audit/reporting
accordance with GC Section 10.04. requirements and confirm that
20. If the audit package in satisfactory form is not this has been addressed in the
submitted to IFAD within ninety (90) days from audit package.
the stipulated due date, the FO must issue an
initial warning notice (exhibit I-7) to remind
the B/R that non-receipt of the audit report in
a satisfactory form within 180 days from the
stipulated due date will result in the suspension
of the project or portfolio and/or other remedies
as relevant.

5 As defined in the financing agreement, as advised by the auditor.

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(b) Audit report. vi. Specific to the withdrawal
application summary:
i. Review the audit report and confirm
that it has been signed/stamped by the • Ensure that withdrawals
auditor; are disclosed by type of
payment method;
ii. Review the audit report and confirm
that it has been prepared in line • Agree amounts of approved
with the minimum requirements withdrawal applications to IFAD
as outlined in ISA 700/750; ISSAI records for accuracy;
1700/1705 or the National/Regional
• Ensure withdrawal application
Standards (note: the basis of the
information is summarized by
financial reporting should be disclosed
category of funding (specified in
in the audit opinion);
the finance agreement).
iii. Determine acceptability of the audit
vii. Specific to the sources and uses of
opinion and/or factual findings
funds statement:
statement;
• Ensure disclosure is provided on
iv. Assess the appropriateness of the audit
a cumulative basis (from project
opinion, based on the overall financial
start) in addition to current/prior
disclosures provided.
period disclosures;
(c) Financial reporting.
• Ensure disclosure is provided by
i. Confirm that the financial statements both category and component
include all disclosures as outlined in (as specified in the financing
table 2; agreement);
ii. Ensure that supplementary disclosures, • Ensure disclosure is provided by
as outlined in table 2, are reconciled to financier and finance instrument;
the main disclosures provided in the
• Confirm that IFAD specific
financial statements;
information is reconcilable to
iii. Ensure that all project financing IFAD records.
sources6 are reported and accounted
viii. Specific to the designated account
for in the financial statements. Start-
statement and reconciliation:
up costs and expenditures incurred
from retroactive financing must be • Ensure that closing cash balances
accounted for and included in the first are reconcilable to total cash
set of aggregate financial statements balances disclosed in the
(where applicable); financial statements;

iv. Review the financing agreement. • Ensure that withdrawal


Where in-kind contributions and/ application information as listed
or counterparty funds are specified, here agrees to the withdrawal
ensure that related disclosure is application summary provided.
included in the financial statements;
v. Review the budget to actual
comparison and consider explanations
provided for variances;

6 Namely IFAD Financing, counterpart contributions, beneficiaries cash contribution, co-financier funds whether provided in cash
or in the form of tax exemption.

114
(d) Management letter. 28. Audit review follow-up. IFAD will
communicate the main concerns and results of
i. Confirm the completeness of the
the audit review process within sixty (60) days
management letter, in line with the
after receipt of the audit package. If required,
content prescribed, including time-
the B/R will be requested to submit additional
bound action plan, as relevant.
information/amended information. The
ii. Review the management letter and B/R may also be requested to submit a time-
identify internal control areas which bound action plan for correcting irregularities
can be improved on by the B/R. If identified by the auditor. IFAD may suspend
required, the B/R can be requested to disbursements if the B/R does not take
improve controls and document this appropriate action within the agreed time frame
in the PIM/FM where applicable. (see exhibit I-9). FOs are specifically required to
capture any required actions communicated to
iii. Ensure that prior year items have been
the B/R in ARTS and capture progress notes on
followed up and implemented.
an on going basis.
iv. Record any identified ineligible
29. If the audit report has identified ineligible
expenditure in ARTS.
expenditure, IFAD should inform the B/R of the
24. Quality assurance - peer reviews of project requirement to refund these amounts disbursed
audit reviews. As part of FMD’s quality and highlight this in ARTS.
assurance procedures, project audit reviews
30. Assessment ratings. Upon completing the audit
are subject to internal peer review on a sample
review, prior to signing-off the audit report, FOs
basis. The peer review is an ex ante process that
must assign performance and risk ratings in
is performed prior to final sign-off on the audit
ARTS, as follows:
report review. The sample for peer review shall
be determined in accordance with the criteria (a) Determination of audit risk rating
listed in exhibit I-10. (high/medium/low);
25. Both the first review and the peer review must (b) Assessment of the auditor performance
be conducted timely in order to avoid delays (highly unsatisfactory to highly
in finalisation of the audit report review (60 satisfactory);
days from receipt). The peer review shall be
(c) Assessment of financial reporting (highly
conducted in the spirit of promoting the best
unsatisfactory to highly satisfactory); and
application of international standards and shall
therefore be performed across regional/grants (d) PSR for quality and timeliness of audit
teams, and includes FOs, Team Leaders and the (highly unsatisfactory (1) to highly
Director, FMD. satisfactory (6)). See exhibit I-11 Guidance
Note on PSR Descriptors. Once saved, this
26. The peer reviewer is expected to provide
rating will be fed into the Operations and
feedback on the adequacy of accounting
Results Management System (ORMS).
standards identified; the adequacy of auditing
Assessment of the quality and timeliness
standards identified; the reasonableness of
audits is a composite rating based on:
the auditor’s opinion; and acceptability of
recommendations to be shared with the • Adequacy of scope and TORs, and
Ministry/Project/External Auditors (including adherence to these;
significance of items raised and compliance with • Timeliness of the audit report;
standards, Action Plan required, if relevant).
• Quality of the audit;
27. Each peer review performed must be recorded
through reporting of main observations noted • Implementation of audit
directly in ARTS. Where deemed necessary, recommendations or agreed action
the FO and peer reviewer may wish to discuss plan in place to address them.
the outcomes directly. Any formal feedback/
replies by the Finance Officer may also be
recorded in ARTS.

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31. Public disclosure of project audit reports. 34. Once the FO is satisfied with the audit reports,
In line with EB approval7 IFAD is required to suitability for public disclosure, the regional
publicly disclose project audit reports relating supervisor (Team Leader) must be notified by
to investment projects, subject to IFAD review the FO via the disclosure workflow in ARTS.
and approval. IFAD’s policy is based on the The supervisor is required to perform a second
premise of full disclosure, which affirms and final quality review to ensure suitability for
IFAD’s commitment to transparency and public disclosure. Any further redactions at this
good governance and is in accordance with stage must be made directly by the supervisor.
international best practice. It is recommended that any additional
redactions are communicated back to the
32. Following audit sign-off, the FO must initiate
FO to be taken into consideration for future
the disclosure workflow in ARTS. FOs must
disclosures.
conduct a thorough quality review of the audit
report ensure that sensitive information that 35. Final approval for disclosure is provided by
may not be appropriate for public disclosure the supervisor in ARTS. The approved file is
is redacted as required. Exhibit I-12 provides automatically uploaded into the Operations
guidance to assist the review of audit reports for Document Centre (ODC), managed by
sensitive information. Further to the guidance OPE, and subsequently transmitted to the
provided, which may not be extensive enough Communications Division (COM) for upload
to cover all situations, FOs are required to use to IFAD’s website.
professional judgement to determine whether
any information should be redacted.
33. FOs must ensure that the following documents/
reports are excluded, in their entirety, from
the final document to be published on IFAD’s
website:
i. Cover letters which accompany the audit
packages submitted;
ii. Management letter;8
iii. Entity financial statements9 related to
investment projects;
iv. Institutional financial statements related to
stand-alone grants;
v. Internal audit reports (if applicable).

7 122nd Session of the Executive Board, 12 December 2017.


8 FO’s are encouraged to remind auditors that the audit package should be sent as separate documents to facilitate the upload
and disclosure process.
9 Refers to the entity responsible for project implementation.

116
LOAN REPAYMENTS AND DEBT SERVICING
MODULE J
Module J
Loan repayments and debt servicing
• Loan repayment provisions
• Amortization schedule
• Revision of amortization schedule
• Denomination and loan-service payment currencies
• Billing procedures
• Handling of under- and overpayments
• Overdue debt service
• Debt settlement plan – policies and procedures

118
J.1 Loan repayment provisions
1. Lending terms. The Policies and Criteria for 2. As of January 2010, IFAD resets the variable
IFAD Financing, section IV(a)(iii), defines reference interest rate twice a year, on the first
the lending terms offered by IFAD. These are business days of January and July. For loans
currently: denominated in SDR, the IFAD reference interest
rate is based on a composite SDR LIBOR/
(a) Loans on highly concessional terms are not
EURIBOR2 six-month rate of the four currencies
subject to interest, but bear an annual
that constitute the SDR, plus a variable spread.
service charge of 0.75 per cent on the
For loans denominated in EUR, the IFAD
outstanding principal amount of the loan,
reference interest rate is based on the six-month
and have a maturity period of forty (40)
EURIBOR, plus a variable spread. Rates are
years, including a grace period of ten (10)
published on IFAD’s website (Interest Rates).
years, starting from the date of approval by
the Executive Board. 3. All the lending terms provide for a grace period,
which ranges from three years for ordinary terms
(b) Loans on blend1 terms are subject to interest
to 10 for highly concessional loans. According
on the principal amount outstanding at an
to GC section 5.01(g), “During the grace period,
annual fixed rate of 1.25 per cent and an
interest and service charge shall accrue on the
annual service charge of 0.75 per cent, and
outstanding principal amount of the Loan
have a maturity period of twenty-five (25)
and shall be payable semi-annually, but no
years, including a grace period of five (5)
payments of principal shall be due.”
years, starting from the date of approval by
the Executive Board. 4. In accordance with GC section 5.02(a),
“The Borrower shall repay the aggregate
(c) Loans on ordinary terms are subject to
principal amount of the Loan withdrawn from
annual interest based on the variable IFAD
the Loan Account in semi-annual instalments,
reference interest rate, and have a maturity
calculated over the maturity period minus the
period of fifteen (15) to eighteen (18)
grace period.”
years, including a grace period of three (3)
years, starting from the date that IFAD has 5. Previous applicable lending terms for loans
determined that all conditions precedent being serviced in IFAD’s current loan portfolio
to withdrawal have been fulfilled in are provided in exhibit J-1 Historic IFAD Lending
accordance with GC section 4.02(b). Terms.

1 ‘Blend’ terms were approved by the Executive Board at its Thirty-Sixth Session on 14 February 2013, in lieu of the
‘intermediate’ terms offered earlier.
2 LIBOR = London Interbank Offered Rate; EURIBOR = Euro Interbank Offered Rate.

Module
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J 119
J.2 Amortization schedule
6. GC section 5.02(a) provides, “The Fund shall 10. In accordance with section 15(a)(iii)(6) of the
inform the Borrower of the dates and amounts Policies and Criteria for IFAD Financing, the
of the payments as soon as possible after the Executive Board may vary the grace period and
start of the period of maturity of the Loan.” A instalment amount for blend and ordinary term
projected amortization schedule is prepared loans provided that:
by FMD for highly concessional and blend
(a) The grace period for the loan shall not
term loans based on the date of approval of the
exceed six years; and
project by the Executive Board. The schedule
is discussed with the borrower during loan (b) Net present value (NPV) in the
negotiations and attached to the minutes of the denomination currency of the loan
negotiations. is maintained.

7. For a highly concessional loan, which has a 10- 11. The new amortization schedule with the revised
year grace period, the first repayment is due on grace period will be prepared using these
the first semi-annual repayment date after the parameters:
tenth anniversary of the date of Executive Board (a) The discount rate used to maintain NPV of
approval. cash flows will be:
8. For a loan on blend terms, which has a five-year (i) For ordinary term loans, the current
grace period, the first repayment would be due variable interest rate applicable;
on the first semi-annual repayment date after
the fifth anniversary of the date of Executive (ii) For blend term loans, the 2 per cent
Board approval. rate, being the annual fixed interest
rate of 1.25 per cent plus the
9. For loans on ordinary terms, a draft projected 0.75 per cent annual rate for
amortization schedule is prepared by FMD service charges.
based on the best estimate of the date of
fulfilment of disbursement conditions and (b) The first 10 instalment amounts (covering
provided to the borrower during negotiations the first five years of the repayment period)
for advance information purposes only. As will be amended to provide revised
soon as the Fund has determined that all repayment of equal amounts. The number
general conditions precedent to withdrawal of instalments (of equal amounts), and the
have been fulfilled, an amortization schedule corresponding period may be increased if
is prepared by ACD and sent to the borrower. required.
It is thus essential that the CPM inform FMD
and ACD promptly of fulfilment of withdrawal
conditions. The note to the borrower is drafted
by ACD.

120
J.3 Revision of amortization schedule
12. The amortization schedule is initially prepared (d) Prepayment of principal amount by the
based on the full amount of approved borrower. GC section 5.02(b) provides,
financing. This may be revised in the following “The Borrower shall have the right to
circumstances: prepay all or any part of the principal
amount of the Loan, provided that the
(a) Cancellation of the unwithdrawn loan
Borrower pays all accrued and unpaid
amount. In accordance with GC section
interest and/or service charges on the
5.02(a), when a portion of the loan is
amount to be prepaid as of the prepayment
cancelled based on GC section 12.02 or
date. All prepayments shall be credited
12.03, ACD prepares a revised amortization
against the remaining Loan instalments in
schedule that reflects the reduced loan
such manner as the Borrower and the Fund
amount and forwards this to the borrower.
shall agree.” Two options will be available
The revised amortization schedule is
to borrowers:
recalculated on the basis of the principal
amount outstanding, being the amount (i) Reduce the instalment amount,
actually disbursed minus the principal maintaining the same maturity
repayment already received by IFAD at the period; or
date of the cancellation. The maturity and
(ii) Accelerate the final maturity date,
grace periods remain the same and the
keeping the same instalment amount.
instalment amount is reduced.
13. In the event the borrower decides to prepay
(b) Where the cancelled undisbursed balance is
part of or the entire loan principal, FMD sends
less than 1,000 units in the denomination
a revised amortization table to the borrower,
currency, IFAD may reduce the amount
taking into account such prepayment.
from the last instalment, thus maintaining
the instalment amount and maturity period
unchanged.
(c) Upon closure of the loan account, if
there are unjustified obligations relating
to unjustified advances of less than
US$50,000 (or the equivalent), the amount
of such obligations will be added to the
outstanding loan amount and a revised
amortization schedule will be prepared
(see also Module E.8, Financing Closing
Date). If the amount of unjustified
obligations exceeds this amount,
suspension procedures in accordance with
GC section 12.01 (a)(ii) will be followed.
A revised amortization schedule will
only be prepared once the outstanding
obligations are fully refunded.

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J.4 Denomination and loan-service
payment currencies
14. In accordance with GC section 2.01, the although, in special circumstances, borrowers
‘denomination currency’, with respect to a loan may make payments in a currency other than
or grant, means the currency in which the loan the loan-service payment currency. When this
or grant is denominated (which may also be occurs, IFAD will convert the currency received
SDR), as specified in the FA. Apart from those into the denomination currency equivalent at
approved in US$ in the early years of IFAD, all the value date of the repayment
IFAD loans have been approved in SDR. For (GC section 6.02).
loans funded from other sources of financing,
17. Withdrawals from loans are made in the
the denomination currency may be different.
respective currencies in which expenditures
15. The borrower’s repayment obligation is in the to be financed have been paid or are payable,
denomination currency of the loan. or in such currency or currencies as IFAD may
select, and the loan accounts are debited by
16. GC section 2.01 defines the ‘loan-service
the amounts withdrawn in the denomination
payment currency’ as the freely convertible
currency as of the value date of withdrawal
currency defined as such in the FA. This is
(GC sections 4.05, 4.06 and 6.01).
normally provided in section B of the FA and
is the currency the borrower or guarantor elects 18. In accordance with GC section 6.03, the
for making payments of principal, interest or applicable exchange rate for conversion between
service charges on the loan. IFAD normally the loan denomination currency and other
restricts the loan-service payment currency to currencies, or from one currency to another,
those included in the composition of the SDR. is the rate published by the IMF as of the
The currency selected remains the sole currency value date.
of payment throughout the life of the loan,

J.5 Billing procedures


19. As the borrower’s repayment obligation is 22. For repayments of outstanding principal and
expressed solely in the loan denomination interest made outside the 30-day period (late
currency, billing statements show amounts due payment), the value date for calculation of
in both the loan denomination currency and charges and interest is the day the money is
the loan-service payment currency, which is received in IFAD’s bank account, or the date
specified in section B of the FA. when adequate information is received from
the borrower instructing IFAD how to apply the
20. All IFAD loans are billed semi-annually on the
repayment funds, referred to as the payment
dates specified in the FA. The billing due dates
identification date, if later. IFAD will convert
will be on the 1st or 15th day of the months as
the currency received into the denomination
agreed with the borrower. IFAD will bill on the
currency using the IMF exchange rate of the
due date and provide the borrower with a period
day on which funds are credited to IFAD’s bank
of 30 days within which to make repayments.
account.
21. For repayments of outstanding principal and
23. All payments sent to IFAD must include a clear
interest made within the 30-day period, the
reference to the loan number and/or correct
value date of the payment is the billing due
purpose, as specified in the billing statement.
date and no additional interest and other fees
Information insufficient for IFAD to apply the
are calculated. In such cases, IFAD will convert
funds will result in crediting the transaction in
the currency received into the denomination
IFAD’s books with a later value date, once all
currency using the exchange rate stated in the
necessary information is received.
billing statement.

122
24. Interest or service charges are calculated 27. If the amount billed is less than the instalment
on a daily basis on the amount of the loan amount, the difference will be included in
outstanding at any point in time. If amounts subsequent bills when cumulative amounts
are withdrawn from and then subsequently disbursed reach the cumulative instalment
refunded to the loan account, the borrower is amounts specified in the projected
not entitled to a refund of the interest or service amortization schedule.
charge paid.
28. On the billing due date, IFAD calculates
25. Interest and service charges are computed on principal, interest or other charges due up to the
the basis of a 360-day year of 12 30-day months due date. This calculation is made in SDR or the
(GC section 5.01(b)). To compute the exact loan denomination currency and then converted
amount of interest and other charges payable into the loan-service payment currency at the
by the borrower on the due date specified in effective rate on the financial reporting date.
the FA, IFAD takes into account all loan-related Details of the loan denomination currency
transactions up to the preceding day. amount and the equivalent in the loan-service
payment currency for the principal, interest
26. IFAD calculates principal billed in relation to the
and other charges are given in the semi-annual
amount disbursed and the scheduled principal
statement of account (the billing statement)
repayments in accordance with the amortization
sent to the borrower. This statement is
schedule. IFAD will bill a borrower an amount
sent electronically.
of principal only up to the amount disbursed
and outstanding at the billing due date.

J.6 Handling of under- and overpayments


29. If an underpayment is: (c) More than the equivalent of US$10,000,
the borrower is requested to provide
(a) Less than the equivalent of US$10,000, no
instructions for applying the overpayment.
follow-up action is required;
Borrowers may elect one of the
(b) More than the equivalent of US$10,000, following options:
the normal procedure for overdue debt
(i) Apply against next instalment due;
service is followed.
(ii) Use to settle an outstanding amount
30. If an overpayment is:
due from another loan; and/or
(a) Less than the equivalent of US$1,000, it
(iii) Refund back to the borrower.
will be applied to the interest or service
charges due at the next billing, without 31. An e-mail is sent to the borrower requesting
notice to the borrower; clarification on which of the three options the
borrower prefers.
(b) More than the equivalent of US$1,000,
but less than the equivalent of US$10,000, 32. The e-mail specifies that if the borrower requests
IFAD advises the borrower that the a refund, the relevant payment instructions
overpayment is being applied to the must be provided.
amounts due at the next billing;
33. The excess funds are left pending until
such time as instructions are received from
the borrower.

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J.7 Overdue debt service
34. Collection steps. If payment is not received by 38. Exceptions to normal follow-up action.
the due date, the collection steps outlined below The collection steps described above are not
are taken:3 followed in the event that:
(a) 10 days. A reminder e-mail of the expired (a) Payments are owed in a currency whose
due date and overdue amount is sent; availability is unduly constrained on
international financial markets at the time
(b) 30 days. An arrears notice, signed by the
the payment falls due.
Director and Controller, ACD, is sent
(exhibit J-2 Arrears Notice); and (b) A borrower reliably informs IFAD that
payment has been made. IFAD normally
(c) 75 days. An arrears suspension notice,
requires evidence of the payment transfer
signed by the General Counsel, is issued
(that is, a copy of the transfer instructions
(exhibit J-3 Arrears Suspension Notice).
from the borrower’s bank to IFAD’s account
35. GC section 12.01(a)(i) provides that whenever with the depository bank named in the
“[the] Borrower has failed to make any Loan billing statement). Standard follow-up
Service Payment when due, whether or not the procedures are then delayed for two weeks.
Guarantor or any other third party has made
(c) The borrower has questioned the
such Loan Service Payment, … the Fund may
amount due.
suspend, in whole or in part, the right of the
Borrower/Recipient to request withdrawals from (d) The amount due is less than the equivalent
the Loan and/or Grant Accounts.” of US$10,000.
36. Such suspension becomes effective on the 39. De minimis amounts. If the amount due
dispatch of a notice by the Fund to the borrower. is less than the equivalent of US$10,000, it
It continues until the Fund has notified the is considered de minimis. The amount is
borrower that the suspension has been lifted in mentioned in notifications to the borrower
whole or in part. issued by IFAD with respect to other overdue
loans. No further action is taken unless another
37. The arrears suspension notice informs the
loan becomes overdue for more than 75 days,
borrower that all IFAD projects in the Member
at which point the entire country portfolio is
State have been suspended (a ‘portfolio
suspended, including the loan(s) subject to the
suspension’). Once this notice has been issued,
de minimis procedure.
i.e. when the payments are overdue by 75 days,
projects are affected as follows: 40. Lifting of debt-arrears-related suspensions.
Once IFAD has received payment from the
(a) The borrower’s right to request withdrawals
borrower for arrears that have resulted in
for any IFAD loan or grant is suspended;
suspension, or the borrower has entered into a
(b) No new projects will be submitted to debt settlement plan, suspension is lifted for
the Executive Board; the entire portfolio, provided that:
(c) FAs for new projects approved by the (a) No loan service payment is overdue by
Executive Board will not be signed; more than 75 days; or
(d) Amendments and modifications of FAs (b) Total arrears are less than the equivalent
will not be processed. of US$10,000.
41. A notice prepared by ACD, cleared by TRE and
signed by the Director and Controller, is sent
to inform the borrower that suspension has
been lifted.

3 Copies of all communications issued by IFAD to the borrower regarding overdue debt service should be sent to
FMD for information.

124
J.8 Debt settlement plan – policies
and procedures
42. The Executive Board may change the terms 44. IFAD’s internal process for formulating a debt
on which a loan is approved to a country settlement plan with a borrower is as follows:
exclusively for the purpose of resolving arrears
(a) Receipt of a formal request from the
that may arise from time to time in payment of
borrower for a debt settlement plan;
interest or service charges and repayment of the
proceeds of loans. (b) Endorsement by IFAD’s Senior
Management to negotiate a debt settlement
43. As a matter of policy, IFAD does not reschedule
plan with the borrower. The broad frame
loan repayments. At most it reschedules the
of reference for the debt settlement is
settlement of arrears, while leaving future
presented jointly by PMD, FMD and ACD
repayment flows intact. To ensure that
to the EMC for their endorsement;
settlement of arrears should not provide
countries with an incentive to default, there is (c) Negotiation of the terms of the debt
an implicit requirement that the NPV of the settlement plan with the borrower;
arrears settlement package should equal the NPV (d) Formal approval of the debt settlement
of the original lending terms and conditions. plan by IFAD’s Executive Board is required.

Module
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FINANCIAL MANAGEMENT AND DISBURSEMENT
OF GRANTS MODULE K
Module K
Financial management and disbursement of grants
• IFAD Policy for Grant Financing
• Scope, principles and objectives
• Financial review of grant proposals
• Quality enhancement, quality assurance, approval and
effectiveness
• Risk-based disbursement
• Financial reporting and audit requirements
• Financial management supervision
• Amendments to grant agreements
• Project completion and closure

128
K.1 IFAD Policy for Grant Financing
1. In April 2015, the Executive Board approved 5. ‘Small grants’ can be up to US$500,000 or
the new Policy for Grant Financing. In addition equivalent, whereas ‘large grants’ are those
to the new policy, a set of implementing above US$500,000 and up to US$3.5 million
procedures were developed to provide or equivalent.
IFAD managers and staff with a consistent,
6. The maximum implementation period is three
harmonized and transparent process applicable
years for small grants and five for large ones.
to all IFAD grants covered by
the policy. 7. The President of IFAD has authority to approve
small grants; large grants are subject to Executive
2. It is applicable to grants funded directly by IFAD
Board approval under the LOT procedure,
from its resources. It does not cover investment
through which grants are considered approved if
projects funded by ASAP or DSF grants.1
no request for consideration at the next session
3. The policy focuses on two specific types of of the Board is received within 30 days of the
grants: (a) global and regional grants, for which date of e-mail notification to Executive Board
the allocation of resources is managed outside representatives. In the event such a request is
the country-focused PBAS; and (b) country- received, the Quality Assurance Group (QAG)
specific grants, for which the allocation of will inform the sponsor, and the proposal will
resources is managed within the PBAS allocation be presented at the next Executive Board session
to ‘green’ countries, whereas ‘red’ and ‘yellow’ for approval. All grants to private-sector entities,
countries – within their PBAS allocation and regardless of size, must be approved during an
consistent with their COSOP – will continue to Executive Board session.
benefit from grants under the DSF mechanism.
4. When country-specific grants are designed as
stand-alone operations, their processing from
concept note to approval follows the Policy
for Grant Financing and its Implementation
Procedures. For country-specific grants that
finance a component of a loan-funded
investment project, grant concepts and quality
reviews are part of the overall investment project
review, processed along the lines of the regular
loan project cycle.

1 See module B, section B.5.

Module K
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K.2 Scope, principles and objectives
8. In addition to its coverage of the policy, this (d) Generate and share knowledge for
module is applicable to grants provided development impact.
through supplementary funds and contribution
11. The objective of this module is to ensure that
agreements.
the fiduciary obligations of IFAD for all grant-
9. Grants are expected to satisfy three main financed operations are met, in accordance
principles: with the FMD Financial Management Strategy,
through:
(a) Contribute significantly to a global,
regional or national public good related (a) FM capacity assessment of recipients (and
to IFAD’s mandate; sub-recipients2) through desk review of
relevant documents;3
(b) Focus on interventions where grant
financing has clear added value and a (b) Development of FM and disbursement
comparative advantage over loans; and arrangements: defining appropriate
fiduciary, FM and disbursement
(c) Not be used as a substitute for resources
arrangements in grant design documents
from IFAD’s administrative budget.
submitted for approval, which are
10. The objectives of IFAD grant financing are to: subsequently reflected in grant agreements
(a) Promote innovative, pro-poor approaches (applicable to large grants); and
and technologies with the potential to be (c) Accurate recording and maintaining of
scaled up for greater impact; data in the loans and grants administration
(b) Strengthen partners’ institutional and system (FXC) for all grant operations.
policy capacities;
(c) Enhance advocacy and policy
engagement; and

K.3 Financial review of grant proposals


12. Grant recipients include: (e) Academic institutions; and
(a) Developing Member States; (f) Private-sector entities: for specific, agreed
grant-financed activities aimed at enabling
(b) Intergovernmental organizations in which
poor rural women and men to achieve
IFAD Member States participate (e.g.
higher incomes and improved food
United Nations agencies, the Consultative
security.
Group on International Agricultural
Research [CGIAR] and its member centres, 13. FMD financial review of grant proposals ensures
and IFIs); that:
(c) Civil society organizations (CSOs) (e.g. (a) Compliance with the policy with respect
community-based rural producers’ and to the eligibility of the proposed grant
other organizations representing poor rural recipients (and sub-recipients if any),
people, and NGOs); when applicable (e.g. unless through
a competitive selection process), is
(d) IFAD-housed entities (e.g. the International
reconfirmed with the grant sponsors, in
Land Coalition);
consultation with LEG;

2 Guidance on sub-recipients is provided in exhibit K-2.


3 In the case of a first-time, large-grant recipient considered high risk, a field visit is recommended.

130
(b) The proposed recipient (and sub-recipient, (d) Physical or other measurable indicators
if any) has the required FM capacity to of project progress that relate to the cost
efficiently manage, account for and report of each component and subcomponent
funds usage; (e.g. training of 100 farmers, construction
of 200 green houses, buying better tools/
(c) Complete financial due diligence is
equipment for beneficiaries, developing a
undertaken on the proposed recipient;
manual for farmers); and
see paragraph 14 for further guidance on
financial due diligence; (e) Sources and type of funding and cost-
sharing arrangements: IFAD financing vs.
(d) Expenditures eligible for financing are
cofinancing, cash vs. in kind, etc.
clearly and consistently defined in design
documents, President’s reports, grant 15. To conduct a review as described in paragraph
agreements and related legal documents; 14, the requesting institution and sponsor are
also required to submit:
(e) Expenditures to be financed (as defined
in cost tables) are reasonable and reflect (a) A detailed budget breakdown by category
value-for-money principles (e.g. the level of of expenditure (compliant with IFAD
indirect costs should not exceed 8 per cent) standard categories) and by component
(further guidance is available in exhibit K-3 (including subcomponents/activities);
Guidance on Eligible Expenditure Categories (b) A procurement plan5 and procedures;
and Budget Justifications); and
(c) Procedures for awarding grants to sub-
(f) Responsibility for execution of the grant recipients (if applicable);
operation is clearly defined as resting
with the recipient, and is at ‘arms-length’ (d) Relevant declarations from the recipient;6
from IFAD. This implies that IFAD (e) The recipient’s AFSs for the previous
staff (including IFAD-appointed FMSs) two years for FMD review. As a general
should normally not participate in the principle, for recipients of both large and
management and execution of grant funds small grants, IFAD requests submission
executed by the recipient, as this could of AFSs to assess financial capacity and
represent a conflict of interest.4 soundness. In the case of United Nations
14. In order to undertake FM due diligence on a agencies, MDBs and CGIAR centres, this
grant-financed project, it is essential to have a requirement is waived;
good understanding of the following: (f) An FMAQ7. In any case, it is the
(a) Project objectives, components, responsibility of FMD to confirm the
subcomponents and activities; financial suitability of proposed recipients.
In the case of a repeated recipient, FMD
(b) Recipient (and sub-recipient) capacities as will ensure that there is no outstanding FM
implementing agencies; or fiduciary issue to be resolved in relation
(c) Amount and type of expenditure under to previous grants (otherwise, specific
each component; covenants could be included in the Grant
Agreement, e.g. conditions precedent to
withdrawal);

4 Please refer to articles 6.2 and 6.18 of schedule 6, General Provisions Applicable to IFAD Large Grant Agreements, in the
document Large Grant Agreements.
5 Where procurement of more than US$200,000 is envisaged under the project (including cofinancing).
6 Recipients must declare that they have read and are in agreement with the grant design document and budget and with the
relevant IFAD grant agreement template.
7 During the design phase, an FMAQ is required when a recipient has not received funds from IFAD in the past, or for a
considerable amount of time (18 months or more), or when the grant amount is significantly larger than the recipient normally
manages and the recipient’s financial integrity must be reconfirmed (see table following paragraph 58 for types of recipients that
must submit an FMAQ). The questionnaire is reviewed and approved as appropriate by the FO (FMD). The FMAQ (summary and
data sheet) is available as exhibit K-5.

Module K
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(g) In addition, the grant sponsor should 18. When cofinancing is being provided to the same
submit legal documentation and the operation by other financiers, the following
eligibility and due diligence checklist, additional factors should be considered during
to be reviewed and approved by counsel due diligence: disclosure of whether the
(LEG). FMD should also confirm that the contribution is in cash or in kind; categories of
recipient has not been blacklisted by the expenditure involved under the contribution;
World Bank, IFAD or other United Nations and assurance that design documents and
agencies. legal documents reflect that the contribution
is reported in all financial reports to IFAD, and
16. In the case of grants to private entities, the grant
that the contribution is subject to external audit.
sponsor must attach two additional forms to the
In particular, the recognition and measurement
design document: the eligibility criteria and the
of contributions in kind should be disclosed in
due diligence sheet (for private-sector entities
the notes to the financial statements.
and privately managed, multi-donor trust
funds). Grants will not be provided for equity 19. The design document, the grant agreement and
or capitalization of such entities, or to finance the President’s Report (the latter in the case of
long-term operating costs or activities. Any grant large grants) should clearly state the amounts
funding to private entities requires a counterpart being provided by other financiers, beneficiaries
contribution from the entity’s resources of at or the recipient, and how expenditures would be
least 20 per cent of the grant amount. shared or attributed. The recipient should have
arrangements in place to account for all sources
17. When the source of funds being granted is
and uses of funds.
supplementary funds, FMD verifies that:
20. These reviews/clearances by FMD and LEG
(a) The end use of funds is consistent with
provide confirmation of key issues:
the mandate of the donor, in accordance
with the contribution agreement (a) Suitability of the recipient’s legal status and
stipulated between the donor and IFAD. capacity;
Where possible, it is recommended
(b) Registration of the recipient in an IFAD
that the agreement between IFAD and
Member State;
the donor be negotiated in parallel
with the agreement between IFAD and (c) Evidence of the authority of the person
the implementing partner to avoid the who will sign the agreement for the
possibility of inconsistencies between the recipient;
two agreements; this applies in particular (d) Appropriateness of the proposal for legal
to European Commission (EC) funding purposes;
agreements.
(e) Suitability of the implementing agency’s
(b) Ensure that any supplementary-fund FA FM and fiduciary aspects, including its
with the recipient clearly states that the absorptive capacity;
disbursement of funds from IFAD is subject
to execution of the contribution agreement (f) Quality of the AFSs, audit reports, etc.; and
and actual receipt of donor funds (the (g) Suitability of the grant budget, including
donor receipt is to be interfaced to FXC by eligibility of the expenditure categories.8
ACD through PeopleSoft JV). If the requesting institution has received
(c) Any specific accountability and reporting grants from IFAD in the past, its financial
requirements of donor partners are performance in managing the grant
harmonized to the extent possible with resources also needs to be reviewed by
IFAD requirements and appropriately FMD. Please see section K.5 for further
reflected in the grant design document and guidance on the review required according
legal agreement. to the risk level of the grant. Any material
changes to the grant design made
(d) Specific documentation requested by subsequent to the review must be flagged to
donors for disbursement of tranches to LEG and FMD for clearance.
IFAD is included.
8 See exhibit K-3 Guidance on Eligible Expenditure Categories and Budget Justifications.

132
K.4 Quality enhancement, quality
assurance, approval and effectiveness
21. The QE and QA processes are applicable to 26. For large grants, the FO reviews submitted
all IFAD-funded grants with the exception documents prior to the QE meeting and requests
of contributions to strategic partners and additional information from the grant originator
microgrants. Grants awarded through if required. The FO completes the checklist of
supplementary funds are subject to other fiduciary due diligence. The checklist should
procedures. include the main review findings and proposed
specific FM and disbursement arrangements. The
22. For small grants, prior to the QE meeting, the
main FM and disbursement recommendations
FO reviews the design package (small-grant
are submitted to the originator for inclusion in
design document [SGDD] and additional
the grant design report, and a summary included
documentation requested at the concept note
in the President’s report. The FO, or the alternate
stage) and provides comments to the originator
if the FO is away, should attend the QE meeting.
on required FM and disbursement arrangements,
QE may also be conducted informally via e-mail.
in accordance with the FMA.9 After the QE
meeting, the FO reviews the revised document 27. Prior to the QA meeting, the FO must review
package to confirm that fiduciary aspects the QA documentation package to confirm that
suggested earlier are reflected. The Checklist FMD material submitted to the originator has
of fiduciary due diligence for IFAD grants been adequately included in the QE reviewers’
(exhibit K-1) is then prepared by the FO, and, compliance note. If any issues require internal
along with a copy of the grant design report discussion within FMD, the FMD grants team
(or concept note) and draft grant agreement, completes this before the QA meeting. Based
forms the package of documents that require on this review, the Director, FMD, will provide
FMD clearance. FMD clearance of the present proposal to the
QA meeting. If a difference of opinion between
23. Please note that if more than two small grants
FMD and the originator remains unresolved
are furnished to the same recipient in the same
before the QA meeting, the FMD representative
fiscal year, and the aggregate value exceeds
should raise this issue at the meeting and FMD
$500,000, FMD procedures applicable to large
clearance will be deferred in case it is not solved
grants would apply.
during this meeting.
24. Attendance of the FO at the QA meeting is
28. An FMD representative must attend the QA
recommended, but not mandatory. In any case,
meeting. This should normally be the grants
the FO must subsequently review the final post-
cluster team leader. If the team leader is
QA document package and confirm that no
unavailable, the FO in charge must attend.
material changes have been made that impact
fiduciary assessments and arrangements. If any 29. At the QA meeting, the FMD representative
significant changes are noted, the Director, FMD, should present FMD’s position on fiduciary
and the grant originator must immediately aspects, as needed. If any change is proposed in
be alerted. the nature of expenditure to be financed or the
implementation arrangements, a review of the
25. A summary of the FM and disbursement
fiduciary implications should be undertaken
arrangements is inserted into a President’s report
to consider any material effects. Prior FMD
(under ‘Implementation arrangements’) before it
clearance would be retracted until the review
is uploaded into Scriptoria. Once the draft grant
is completed, and the FO or grants cluster
agreement is prepared by LEG, the FO
team leader should inform the originator
will ensure that FM and disbursement
immediately.
arrangements, as well as financial reporting
and auditing requirements, are inserted in the
grant agreement.

9 Elements of FM and disbursement arrangements suggested for inclusion are derived from the grants checklist and should
normally include financial reporting, auditing and disbursement requirements.

Module K
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30. LEG clearance is obtained before QA. After QA (b) Model large grant agreement for non-
approval has been obtained, the FO must follow governmental recipients (NGOs, CSOs,
up with LEG to confirm that all fiduciary actions international or intergovernmental
and covenants are correctly reflected in the grant organizations);
agreement.
(c) Small grant agreement for Member States;
31. A summary of the FM and disbursement
(d) Model small grant agreement (for non-
arrangements must be inserted into the
governmental recipients); and
President’s report (under ‘Implementation
arrangements’) before it is uploaded into (e) Model contribution agreement for IFAD-
Scriptoria. financed contributions and microgrants.

32. GRIPS. As soon as a grant is approved, FMD, 34. These can be used in all cases except for grants:
LEG and the grant originator(s) will be informed (a) To the Food and Agriculture Organization
by the Grants secretariat. ACD is responsible of the United Nations (FAO), which
for recording the new grant approval in IFAD’s has a template modelled on its specific
financial books.10 The grant number assigned to requirements;11 or
the new grant is now generated in GRIPS, thus
it is the responsibility of the grant sponsor (and (b) Financed from contribution agreements
not of FMD or ACD) to provide this number and with supplementary fund donors, for which
to ensure that all steps are taken to guarantee the grant agreements are modified to reflect
that the grant number is entered into FXC for the terms specified in the contribution
ACD set-up of the grant account in FXC. FMD agreement.
staff should upload the following documents 35. Preparation of grant agreements. Grant
to the FMDB on grant approval: checklist of agreements for small grants are prepared by the
fiduciary due diligence for IFAD grants (exhibit grant sponsor; for all other grant agreements,
K-1), concept note and/or design document, the sponsor provides LEG with the project
FMAQ, grant agreement and amendments, and description (schedule 1). All agreements for
President’s report (for large grants and for small large grants and small grants to United Nations
grants to for-profit recipients). agencies that do not use the standard agreement
33. Grant agreement. A grant agreement is required format, are prepared by LEG in collaboration
for all grant-financed projects. Templates for with FMD. The reviews on grant agreements are
grant agreements and associated schedules coordinated between LEG and FMD.
have been developed to streamline the project 36. Grant effectiveness. The grant effectiveness
start-up process. There are five standard format date is defined in all standard agreements as
agreements: the date on which the grant agreement is signed
(a) Standard FA (for large grants to by IFAD – either by the divisional director or
Member States); by the President of IFAD. On signature of the
agreement by the sponsoring divisional director,
the originating division will immediately inform
FMD and LEG of the signing and effectiveness
of the grant. In cases where the President of
IFAD signs the grant agreement, FMD, LEG and

un-
dit-

t (if
rds 10 The timely recording – in IFAD financial records and statutory accounts – of newly approved financial commitments (grants) and
their effectiveness is of critical importance. Normally in November, and in any case sufficiently in advance of the year-end closing
period, FMD establishes and publishes in-house the time frame and deadlines for approval and registration of all IFAD financial
onal
commitments related to the relevant fiscal year, including those related to grants.
on-
11 Other United Nations agencies may refuse to use the standard agreement format; in these cases, LEG will determine the
format to be used. There could also be other cases (mainly the World Bank or other IFIs) in which IFAD will be obliged to use the
recipient’s agreement format. This must be approved by LEG in all cases.

rd. 134
ter-
the originating divisions will be informed of 38. Procurement. Procurement under grant-
the signature and effectiveness. In both cases, a financed projects follows procurement practices
scanned copy of the agreement is to be circulated of the grant recipient, except in the case of
by e-mail as soon as the agreement is signed, supplementary fund donors, where procurement
and in any case no later than five working methods will reflect the terms agreed on in
days from the signature date. If the recipient the contribution agreement with the donor.
fails to provide the documentation needed for Where procurement of more than US$200,000
disbursement of the grant within three months is planned under the project (including both
of the effective date, IFAD may terminate the the IFAD grant and cofinancing), the grant
agreement. Similarly, grant agreements that have recipient is required to submit to IFAD, as
not disbursed within 12 months of approval part of the grant design requirements: (a) its
may also be terminated. own procurement procedures or a statement
that it will follow IFAD’s Project Procurement
37. Workplan and budget. Except for grant
Guidelines; and (b) a procurement plan for the
financing from supplementary funds, the
project or activity.
eligible expenditures for activities foreseen by
the project and related grant disbursements to
finance such expenditures in advance must be in
accordance with a project workplan and budget.
Where the project implementation period is 18
months or less, a single workplan and budget
can be used to cover all activities and associated
expenditures. Where the implementation period
is longer than 18 months, AWP/Bs are required.
AWP/Bs submitted by the recipient to IFAD are a
‘condition prior to disbursement’.

K.5 Risk-based disbursement


39. FMA. The fiduciary risk-rating assessment of 40. During implementation, the risk rating of each
each recipient and project will be carried out grant-funded project will be reassessed, based
initially during the project design phase.12 The primarily on findings made during review of
FO will annually review the risk rating for large the audit report, supervision missions and
grants with an implementation period of more disbursement experience.
than 18 months during implementation and
41. Risk-based disbursements. As part of project
supervision.13 For other grants, the risk-rating
design, FOs will recommend disbursement
review may be desk-based and is left to the
arrangements aligned with the documented
discretion of the FO. Assessment is carried out
fiduciary risk assessments to be agreed with the
by FOs in collaboration with relevant grant
recipient.
sponsors. The project’s fiduciary risk rating will
be categorized as low, medium or high. Results 42. At the time of WA processing, the project’s
of risk assessment will be documented, along fiduciary risk, together with WA characteristics,14
with the agreed risk mitigation measures, which will be considered in establishing the minimum
will be integrated into grant agreements. level of checks to be performed on the WA
during disbursement.

12 The ‘design phase’ refers to the process starting with the submission of concept notes to OSC, until the completion of the QA
process.
13 This may be done at the time of the annual grants status report (GSR) process.
14 ‘WA characteristics’ comprise WA amount, disbursement method and timing, and nature of the recipient.

Module K
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43. The underlying principle is that, even in cases 49. The default risk rating for United Nations
of accelerated disbursements for WAs linked agencies, MDBs and IFIs is low.
to projects assessed as low risk, an appropriate
50. The default risk rating for small grants (less than
level of controls must be applied in order to
US$500,000) is low, except for private-sector
effectively mitigate the risks.15
recipients. If a higher risk rating is warranted,
44. The project’s FM risk rating and WA FMD staff will document the justification.
characteristics will determine:
51. The default risk rating for IFAD-funded grants
(a) Checks to be performed – timing, scope through contribution agreements is low.
and frequency;
52. The default risk rating for grants funded through
(b) Consultations and remedies required; and contribution agreements that IFAD has entered
into with supplementary fund donors (e.g. EC)
(c) Authorization levels required to review and
is high.
approve disbursements.
53. Defaults by a recipient on any fiduciary covenant
45. Monitoring and reporting. Risk ratings will be
for a specific grant operation automatically
recorded in the FMDB.
imply an elevation of the risk rating for the next
46. Structure of risk assessment. FM risks will be grant operation for that recipient.
classified into two groups:
54. Setting up the project record. FMD staff create a
(a) Inherent risks: risks inherent to the financial new project record in the FMDB by entering the
control environment in which the grant primary recipient and project details. This will
operation will be implemented, including be done at the time the concept note is approved
country or organizational environment, as by the OSC meeting if the recipient has already
well as risks inherent to the design of the been identified. If the concept note involves a
project itself (see also paragraph 55); competitive call for proposals, the record will be
(b) Control risks: risks that the control created during the QE process.
mechanisms established to mitigate FM 55. Determining the inherent institutional risk (at
risks fail during implementation and thus the recipient level). The inherent risk provides
do not provide the assurance needed. an indication of the fiduciary environment into
47. Risk factors for each grant will be identified which IFAD funds will flow. Factors to consider
through the standard FMAQ template (exhibit include the country/regulatory environment,
K-5 FMAQ (summary sheet and data sheet)) and institutional governance arrangements and
the resulting conclusions documented. Desk others. Inherent risks may also arise from specific
reviews will be conducted based on information design features of the operation, such as complex
obtained from recipients, using FMAQ templates implementation arrangements. Additional
designed to capture essential information. The guidance is available in exhibit K-4 Assessment of
initial assessment should normally be completed FM Risk Associated with Recipients and Projects.
before the QE meeting. The exercise will result 56. Assessing control risk. Project-level FMA should
in an assigned risk rating on a 3-point scale: be conducted and recorded for each project
high, medium and low. Some recipients are during the design phase. Assessment establishes
exempt from FMA; the assessment methodology whether appropriate accounting, FM control
is described in paragraphs 14 and 16 of this and reporting systems will be, or can be, in place
module. when funding begins.
48. For recipients identified as strategic partners and 57. Risk assessment templates have been designed
repeat recipients (e.g. CGIAR centres), the FMAQ to capture essential information. The level of
exercise should be conducted at least once every intervention by IFAD staff will depend on the
three years. Background information obtained nature of the recipient, past IFAD fiduciary
for a documented assessment will be stored to experience with that recipient and the size
allow easy access in subsequent years. of the grant.

15 ‘Disbursement risk’ is the risk that disbursements are made to an unauthorized recipient and/or not made for
the purposes intended.

136
Recipient group Assessment method Assessment frequency
Small grant Large grant
United Nations agencies, No FMAQ assessment No FMAQ assessment N/A
multilateral entities

CGIAR centres No FMAQ assessment Self-assessment by Initial FMAQ during design


recipient (FMAQ)a phase; reassessment
once every three years
NGOs No FMAQ assessment Validatedb self- Initial FMAQ during design
assessment (FMAQ) phase; large grants with
implementation periods
longer than 18 months:
reassessment to be
conducted annually by
FO during implementation
and supervision
Private sector Self-assessment by Validatedb self- Initial FMAQ during design
recipient (FMAQ) assessment by recipient phase; large grants with
(FMAQ) implementation periods
longer than 18 months:
reassessment to be
conducted annually by
FO during implementation
and supervision
a
However, underlying reporting/audit timeliness should be documented.
b
Validation process shall seek confirmation on some key assertions, through personal visits when possible, or by obtaining
relevant documents.

58. The recipient’s capacity will be assessed with (b) Medium-risk projects will be reassessed
respect to organization/staffing, budgeting, annually through desk review only.
flow of funds, accounting, financial reporting,
(c) Low-risk projects will be reassessed in the
internal controls, and internal and external
case of non-compliance with the covenants
audit.
specified in the grant agreement.
59. Risk updates are normally done on the basis
61. Design of disbursement arrangements.
of financial reports received, annual project
Arrangements should be agreed with the
audit-report review findings and the quality
recipient and recorded in the design report or
of documentation submitted to support
grant agreements.
disbursements. Where a supervision mission is
scheduled, FMD staff may consider participating. 62. The FO is responsible for monitoring
disbursement arrangements and thus should
60. For large grants, if the implementation period is
monitor projects on a continuing basis to
more than 18 months, project risk ratings will be
establish whether it remains appropriate to
reviewed as follows:
disburse funds to a project under existing
(a) High-risk projects will be reassessed arrangements.
annually through a desk review and a
63. Disbursement methods and documentation16
supervision mission undertaken by the FO
will follow the same principles applied to
at least once every three years.
investment loans, with some adjustments for
the risk rating:

16 Please refer to specific reporting requirements for EU/EC–financed projects as outlined in the
European Union-Funded Programme: Financial Management Guide.

Module K
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Risk rating Large grant Small grant
Imprest (Private-sector recipients only)
Initial advance 6 months’ projected Imprest
High expenditure Initial advance 6 months’ projected
Replenishment based on SOEs expenditure
Replenishment based on Smart SOEs
Revolving fund (Private-sector recipients only)
Initial advance – up to 50% of AWP/B if Revolving fund
implementation period is more than 18 Initial advance – up to 50% of AWP/B if
months; up to 75% of approved grant amount implementation period is more than 18
if implementation period is less than 18 months; up to 75% of approved grant amount
Medium months if implementation period is less than 18
Replenishment if at least 75% of previous months
advance and 100% of preceding advances Replenishment if at least 75% of previous
justified advance and 100% of preceding advances
justified
Revolving fund Revolving fund
Up to 75% of AWP/B Up to 75%a of AWP/B (or approved grant
Replenishment if at least 75% of previous amount if implementation period is less than
Low advance and 100% of preceding advances 18 months)
justified Replenishment if at least 75% of previous
advance and 100% of preceding advances
justified
a
A higher-percentage advance may be considered as an exception in the case of United Nations agencies, MDBs or IFIs as
recipients, subject to prior approval by the Director, FMD.

64. Ex ante checks. Checks performed on WAs (ii) Medium risk: disbursement will be on
will be placed within a broader framework of a revolving fund basis. Documentation
assurance tools (guidance is available in exhibit will be certified SOEs;
K-6 Ex Ante reviews for WAs), including:
(iii) Low risk: disbursement will be on a
(a) Ex ante checks on entitlement, accuracy revolving fund basis. Documentation
and substance of disbursement transactions will be certified SOEs.
before disbursement. To support this,
(b) External audits of financial statements for
the nature and quality of supporting
specific operations; and
documents will be calibrated to the risk
ratings: (c) Externally audited institutional financial
statements of the recipient.
(i) High risk: disbursement will be
on an imprest basis, with six- 65. A segregated bank account is normally not
monthly advances/replenishments. required unless the accounting capacity has been
Documentation will consist of certified assessed as weak.
Smart SOEs. Supporting accounting 66. Authorization of payments is according to the
documents will be requested on a current delegation of authority.
sample of transactions and validated
before disbursements are authorized; 67. Ex post checks. Guidance on ex post review is
provided in exhibit K-7 Ex Post Reviews for WAs.

138
K.6 Financial reporting and audit
requirements
68. The recipient must submit semi-annual Financial 70. For grants implemented over a period exceeding
Reports including expenditure transaction lists17 18 months, the recipient must provide AFSs.
and SOEs to IFAD.18 SOEs should follow the If institutional AFSs are submitted rather than
template provided in the agreement and must project-specific AFSs, they should explicitly
be signed by one authorized delegated recipient disclose the use of funds provided by IFAD in
in accordance with the authorizations submitted terms of revenues/receipts and expenditures/
by the recipient. Each SOE shall also include payments. If this analysis is included in an
expenditure from cofinancing, if any, and specify annex or exhibit of the AFSs, then the relevant
whether the expenditure was in cash or in kind. note should be included in the external auditor’s
opinion scope. AFSs should be submitted within
69. Transaction lists should be requested for all
six months of the end of the recipient’s fiscal
large grants, EC-financed grants (regardless
year. Additionally, AFSs must be accompanied
of the grant size) and high-risk small grants.
by a management letter, which should be
These should be included in the audit exercise
received, at the latest, one month from
to ensure eligibility of expenditure. IFIs, MDBs
submission of the AFS.
and UN Organisations at times omit to submit
transaction lists; for this category of recipient 71. For grants implemented for a period shorter
the omission is not treated as non-compliance, than 18 months, one AFS can be submitted for
though in practice submission of transaction the entire project implementation period. The
lists from all recipients should be strongly AFS should be submitted within six months of
encouraged. UN Organisations that are parties the end of the project implementation period.
to Co-delegation agreements with the EU and
72. The cost of the audit exercise(s) can be included
IFAD have an obligation to provide IFAD, as the
in the operating costs paid from grant proceeds.
Administrative Agency, with data, information
As a result, the project should have budgeted
and reports for IFAD’s consolidation and
enough funds to cover all project audits.
transmission to the EU. As Co-delegatees, the
UN Organisations are therefore obliged to 73. When audit reports are received and the required
submit the transactions lists when required. documentation is complete, they will be
uploaded into ARTS for review.

AFS and
Grants Expenditure transactions lista
management letter
Large, EC-funded (all) and high-risk
√ √
small grantsb
Small low- and medium-risk √ X
a
IFAD should request and encourage submission of expenditure transaction lists from United Nations agencies, IFIs and
MDBs. Non-submission however will not necessarily be treated as non-compliance, unless in the case of UN agencies that
are party to an EU Co-Delegation Agreement.
b
See table following paragraph 58 for types of recipients that must submit an FMAQ.

17 Small grants rated medium or low risk are not required to submit a transaction list.
18 Financial Reports must be submitted within four months of the last day of the preceding six-month period.

Module K
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K.7 Financial management supervision
74. Financial Management supervision of small advance was disbursed less than six months
grants is carried out based on desk review of before completion, justification should
documents. Missions should be planned for begin three months before completion.
large and higher-risk projects in consultation Otherwise, justification should begin six
with the Director, FMD. months before completion;
75. Supervision of activities being implemented by (e) Physical site visits as part of supervision.
the recipient is the responsibility of the grant These are discretionary and may be
sponsor. Overall financial supervision is the programmed only if warranted by serious
responsibility of FMD. fiduciary concerns or if requested by the
sponsor; and
76. The following tasks must be undertaken:
(f) Diligent review of SOEs, with reference
(a) Review of IFRs, if these have been required,
to supporting accounting evidence for a
to determine financial progress;
sample of transactions. FMD staff may
(b) Review of AFSs of the recipient, with request that the recipient make available
appropriate disclosure of the funds received all documentation related to a specific cost
from IFAD and spent. Follow up of audit item or expenditure.
qualifications, if any;
77. For United Nations agencies, only a review of
(c) Compliance with any specific FM covenants SOEs is undertaken.
in the grant agreement;
78. For supplementary funds, the extent of
(d) Balances outstanding in the DA (if supervision should be as stated in the
applicable) or advance(s) given. If the final contribution agreement with the donor.

K.8 Amendments to grant agreements


79. Changes in the project completion date and (e) The sponsor distributes copies of the
grant closing date, and/or project budget countersigned letter to the sponsor and
(schedule 2): FMD. FMD must notify ACD to update the
grant master data in FXC.
(a) The recipient submits a request in advance
of the project completion date to the grant 80. Grant extensions are limited to a maximum of
sponsor providing sufficient justification two years – for a one-year period each, in the
for the request. case of large grants, and to a one-time, one-year
period for small grants. The department head’s
(b) The grant sponsor prepares a draft
approval is required to waive this provision.
amendment letter and a memo supporting
Under no circumstances may the project
the request to the responsible divisional
completion date be extended if it has already
director.
expired. The project budget may not be increased
(c) The draft amendment letter and memo are above the original total amount.
cleared by FMD.
(d) The cleared amendment letter (two copies)
and memo are submitted to the divisional
director for signature.

140
81. A request for a budget reallocation should not be 83. In the event that suspension or termination of
accepted in the following cases: a grant is required, the following procedures
should be followed. Suspension or termination
(a) The recipient has a category of expenditure
of the grant can be initiated by the grant sponsor
beyond the 10 per cent overdraft applicable
or by FMD. If initiated by the grant sponsor,
under the grant agreement. Exceptions
s/he requests LEG to prepare the draft letter
will be made if sufficient justification is
and cover memo, which is cleared by FMD and
provided for a reallocation of budget in
then sent to the responsible divisional director
core grant activities.
for signature and transmittal to the recipient.
(b) The rate of expenditure for personnel and If initiated by FMD, the same procedures apply
operating costs is far higher than the rate of with the sponsor’s clearance required, and the
expenditure for core grant activities. letter and memo are then sent to the divisional
director for signature and transmittal to
82. Changes to schedule 1 (project description) or
the recipient.
amendment to/addition of special provisions,
as well as changes to any implementation
agreement mentioned in schedule 1, paragraph
1.8: these are addressed in the same way, with
additional clearance by LEG after clearance by
FMD. Changes that significantly alter the scope
or characteristics of the project as originally
approved (as determined by LEG) should be
cleared by the QAG as well.

K.9 Project completion and closure


84. A large part of the FM of grants includes FMD (a) Identify grants that are near their closing
monitoring of timely closure of the grants date; and
portfolio. This includes follow-up with the
(b) Identify grants that have passed their
grant sponsoring division to ensure that the
closing date and list the required
grant recipient provides final SOEs and refunds
documentation to be submitted by
of advances where this is the case, as well as
the recipient as stipulated in the grant
submission of the final AFS.
agreement.
85. President’s Bulletin PB2011/4, Procedures for
87. The reports seek to encourage originating
financing from the grants programme, states,
divisions/grant sponsors to contact the recipient
“To ensure timely closure, CFS [now FMD] will
to follow up on financial closure. They must
monitor the status of grants in the portfolio and
state what is required by FMD/ACD to process
periodically highlight those that have reached
closure.
completion, but have not yet been closed, and
the reasons. It is then the responsibility of the 88. Grant closure will follow these procedures:
grant sponsor to follow up on outstanding (a) Four months after the grant closing date,
conditions with the recipient and expedite the grant sponsor sends a communication
compliance to allow for closure” (p. 17, to the recipient to request submission of
paragraph 79). the missing documentation within 30 days.
86. Information Circular IC/CFS/03/2011 (exhibit The communication should clearly outline
K-8) gives procedures for the closure of expired the consequences of non-compliance. If
grants.19 FMD issues quarterly reports to: the grant recipient fails to respond, the
originating division will inform FMD.

19 An expired grant is a grant that is past its closing date, but has not yet been closed in IFAD accounts
and records.

Module K
A 141
Until a response or proper justification for (e) FMD will flag the non-compliant recipient
delaying submission of documentation is and record it in an internal ‘ineligibility
received, the FO should add the recipient list’. This list will provide a description
to the internal ineligibility list for financing of problems encountered and will be
and ensure that no new grants to the maintained by FMD and made available on
recipients are cleared by FMD until such FMD’s xDesk site.
justification is provided.
(f) Non-compliant recipient(s) can regain
(b) FMD will review the documentation eligibility if they are able to provide
and, unless there is a valid reason to do adequate proof that past problems have
otherwise, will carry out the required been resolved.
procedures to close the grant. As and when
89. For all grants for which a successive phase
deemed appropriate by the Director, FMD,
is intended, a grant evaluation is carried out
the Office of Audit and Oversight (AUO)
by IFAD (the grant sponsor, not IOE) or a
may be consulted for matters related to the
third party. Such evaluations should include
anticorruption policy or the potential need
assessment of:
for an investigation. FMD will inform the
grant recipient of the financial and legal (a) Evidence of achievements of previous phase
consequences of the grant closure. objectives;

(c) Before closure, FMD must receive the final (b) Rationale for and value of continued
documentation as required in the grant investment;
agreement, as well as clearance of the grant (c) Clear description of an exit strategy (or
completion report from the grant sponsor. explanation of the lack of one); and
FMD/ACD staff must request the task
manager to follow up with the recipient (d) Compliance with all fiduciary obligations
regarding the refund of any advance as stated in the grant agreement.
balance outstanding.
(d) If the non-responding grant recipient
is a United Nations agency, the World
Bank or other similar international
public institution (including CGIAR
centres), before declaring ineligibility,
FMD will contact the finance sections
of the respective organizations to seek a
resolution of all outstanding matters.

142
SUPPLEMENTARY FUNDS, THEMATIC TRUST
FUNDS AND FUNDS FROM OTHER IFIS
MODULE L
Module L
Supplementary Funds, Thematic Trust Funds and Funds from other IFIs
• Introduction
• Implementation procedures
• Project design phase
• Financing agreements

144
L.1 Introduction
1. Apart from its regular resources, IFAD international workshops, regional
also manages a variety of funds including conferences, hiring of consultants and
supplementary funds, thematic trust funds, financing of single-purpose projects; and
and funds from other IFIs. These resources are
(d) Funding of loan repayments for
provided under supplementary fund donor
specific projects.
agreements or other framework arrangements.
Most agreements signed with these donors 4. Examples of the financing arrangements
normally define the terms and conditions include:
under which the resources provided to IFAD (a) Spanish Trust Fund Facility. In September
will be managed and administered by the Fund 2010, the Executive Board approved the STF.
on conditions mutually agreed between IFAD It enabled IFAD to provide and administer
and the donor(s). In 1987, the President was loans to priority beneficiaries (including
delegated authority by the Board to receive and managing reimbursement of principal
administer supplementary funds to support and interest) as a trustee on behalf of
IFAD projects and operations.1 the donor, using IFAD’s governance and
2. As these are not IFAD regular resources, decision-making systems;
donors may impose certain restrictions on (b) Adaptation for Smallholder Agriculture
how these funds are used and reported on Programme (ASAP). A multi-donor
by IFAD as an administrator on behalf of arrangement, ASAP was approved 2012.
the donors. President’s Bulletin PB/2013/12 Under this programme, pooled funds from
PB/2013/12 Principles and procedures for diverse sources are used to provide grants
mobilizing and managing supplementary funds to beneficiary countries to address climate
(exhibit L-4) defined modalities and procedures issues affecting smallholder agriculture;
for all supplementary funds (see exhibit L-3
PB/2014/08 Procedures for supplementary funds (c) Contribution agreements with the
and GEF-administered grants). European Commission;

3. In the past, IFAD has entered into various types (d) Global Environment Facility (GEF);
of supplementary fund, thematic trust fund and Least Developed Countries Fund (LDCF);
other grant-based arrangements, such as: Special Climate Change Fund (SCCF);
and Global Agriculture and Food Security
(a) Agreements under which the donor Program (GAFSP).
suggests general thematic and geographical
priorities, providing IFAD with the
flexibility to allocate grant funds to
beneficiaries;
(b) Agreements for providing financing support
to project-specific activities;
(c) Thematic facilities that finance thematic
programmes, technical assistance activities,

1 Parallel cofinancing of IFAD loan/grant projects by other major development banks is not discussed in
detail in this module.

Module A
L 145
L.2 Implementation Procedures
5. In cases where the funds received are used to (b) Funds provided directly to the B/R by
finance or co finance an investment project or donor agencies, as parallel cofinancing
grant through a specific agreement between with IFAD supplementary funds, should
IFAD and the B/R implementation of projects preferably apply combined financial
is the sole responsibility of the B/R, while reporting and audit arrangements. FMD
IFAD’s role is limited to supervision of project staff should attempt to reach an agreement
implementation and administration of the with donor agencies and document this as
financing. In some cases, however, supervision appropriate.
and/or loan administration are entrusted to a
(c) All supplementary fund disbursements
CI, normally when the CI is a cofinancier of the
are subject to the condition that sufficient
project.
funds have been deposited with IFAD
6. IFAD’s overall fiduciary principles and and that IFAD has been notified of such
considerations, as outlined in module deposit in writing. IFAD shall have no
A, normally apply to all such financing obligation to extend any financing under
arrangements. Donors may however impose a supplementary fund account if no funds
certain restrictions on the use of their funds, are available.
which could entail reporting standards that
7. With respect to European Union requirements
differ from IFAD’s, as well as other fiduciary
for grant financing the dedicated manual
methods of compliance according to the donor’s
‘European Union: Financial Management Guide’
own procedures. For this reason, the following
(EU FMG) has been developed and constitutes
additional procedures, apart from IFAD FM
the reference for all financial administrative
procedures and assessments must be adhered to
aspects of EU cofinancing of projects or stand-
where financing or cofinancing is supplied by
alone programmes.
supplementary funds, thematic trust funds or
The FMD-ACD EU team is to be consulted
funds from other IFIs. FMD staff should consult
during the design of any EU-funded projects
contribution agreements between IFAD and the
and programmes.
donor(s) to understand specific accountability
requirements for each donor and reflect these
suitably in the FA and/or LtB/R. Default
requirements are the following:
(a) Supplementary funds administered by
IFAD designed either as stand-alone
projects or those blended into projects
as cofinancing with IFAD funds should
follow IFAD’s usual procedures with regard
to FM arrangements (e.g. budget format,
financial reporting and auditing), as well as
key contractual dates (e.g. reporting dates,
completion and closure dates), unless
otherwise specified in the FA. Projects with
blended resources must disclose amounts
disbursed and spent from the various
financing sources separately, which should
be submitted to IFAD
as appropriate.

146
L.3 Project design phase
8. Where projects administered by IFAD are (c) AAs for the DA should be notionally
cofinanced or funded by supplementary funds, attributed to each financing source for
thematic trust funds or from funds from other project accounting purposes. For example,
IFIs, the PDRs and President’s reports should if the total financing mix is IFAD loan
separately state and identify these. This will (US$9 million) and ASAP (US$1 million),
ensure that funding is separately tracked and then an overall AA of, say, US$2 million
recorded within IFAD‘s financial and other should be attributed on a pro rata basis
reporting systems. A review of the agreement as US$1.8 million to the IFAD loan and
with the donor will also be required to ensure US$0.2 million to ASAP (i.e. in proportion
that any donor conditions or restrictions are to the financing mix). This attribution ratio
reflected in the FA. Separate, specific clearance will be required for loan administration
is required for the PDR and FA, together with and accounting purposes, and to ensure
verification of donor funding availability. that, at project closing, the unused advance
balances are correctly allocated to the
9. Disbursement arrangements with respect to the
different financing sources. This ratio
pooling of Designated Accounts (DA): where
attribution split of AAs needs to be stated
financed by both IFAD and supplementary
in the LtB/R.
donors, projects are encouraged to use a
pooled, single DA for the multiple financing (d) The control over ‘which-source-pays-
sources administered by IFAD (e.g. IFAD loan, for-what-expenditure’ will move to the
IFAD grant, supplementary donor funds, accounting system for expenditure rather
ASAP, Belgian Fund for Food Security, GEF). than the bank account. Project accounting
Advantages of pooling the DA would be: software should be able to attribute and
record each amount it receives into the DA
(a) Only one WA is prepared for advances,
to the respective financing source and to
SOE/s and replenishments each time,
enter expenditures accordingly on a pro
rather than multiple separate ones for each
rata basis. In other words, each financing
financing source;
source will be a separate ledger account,
(b) Project banking arrangements and the not a separate bank account.
required bank reconciliations are simpler;
(e) Withdrawal applications: a combined WA
(c) At the time of closure, it is easier to ensure (advance or replenishment) for several
full utilization and to effect refunds for financing sources will be accepted, but
total unused funds, rather than from each these should state separately the amount
financing source. they require and are justifying for each
10. The following guidelines will assist in the source. The bank account to be provided
implementation of pooled DAs: will, of course, be only one.

(a) The single currency of the DA must be (f) SOEs must either be separated for each
applicable for all financing sources in the financing source, or show the sharing
pool, and agreed with the B/R and donors. percentage in the common SOE, so that the
WA amount can be traced to its SOE.
(b) IFAD’s category allocation for schedule
2 can also be prepared on this pooled
ratio basis (i.e. normally, supplementary
fund donors do not impose restrictions
on the financing of certain categories).
Similarly, B/Rs do not require that certain
categories be funded on a loan or grant
basis, dependent on the project type of
expenditure (e.g. infrastructure, training
or staff costs).

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L.4 Financing agreements2
11. All specific provisions required by the donor 14. Disbursements. Framework agreements may
in relation to financial management and require that donor payments to IFAD be
administration must be reflected in the PDR, FA made in various tranches at differing intervals.
and LtB/R. Thus, when reviewing WAs that relate to
supplementary funds, the finance assistant
12. Currency. Additional care is required when
performs a manually initiated interface in
drafting the FA, particularly if the agreement
PeopleSoft to confirm funds available for
with the donor provides for financing
disbursement – that is, funds that have been
in a currency different from that of the
received from the donor and are subsequently
denomination currency of the financing or
available to cover cumulative WAs to date.
grant agreement. The denomination currency
IFAD applies its risk-based controls during
may be in any currency and not necessarily one
the WA review process, also performing other
of the currencies included in the SDR basket.
verification checks imposed by the donor, if any.
On receipt of supplementary funds, thematic
trust funds or funds from other IFIs in a 15. Unless otherwise specified by the framework
currency other than EUR and US$, IFAD`s bank agreement, IFAD standard categories of
will convert the funds into the bank account expenditure are applied to schedule 2 of the FA.
denomination currency (US$) at the spot rate of If the donor requires specific categorization of
the receipt date. expenditure, it must be applied in accordance
with the donor’s procedures. For example,
13. In this case, and in order to ensure that IFAD
the European Commission expressly requires
does not bear exchange rate risks, the financing/
expenditure to be reported according to
grant agreement with the B/R should specify
components that differ from IFAD’s standard
an indicative grant amount in US$ equivalent
categories.
to the amount received in non-US$ currency
received from the donor, net of IFAD`s 16. Key contractual dates. When establishing
management fee. The actual US$ amount will be the key contractual dates in the financing
determined based on the exchange rate applied agreement between IFAD and the B/R (e.g.
by the bank; the US$ grant amount in FXC will reporting dates, agreement completion and
be adjusted accordingly. closure dates) the corresponding dates in the
agreement between IFAD and the donor must be
Currency of
Currency of any taken into consideration. Reporting deadlines
the Supplementary
related grant should ensure that the B/R provides all required
Fund contribution
agreement(s)
agreement information to IFAD well in advance of the
between IFAD and
between the donor
the recipient dates on which IFAD is required to report to the
and IFAD
donor, and in general the agreement between
Euro Euro
IFAD and the B/R should complete and close
US$ US$
in advance of the respective completion and
Currency other than
US$* closing dates of the agreement between IFAD
Euro and US$
and the donor. This will ensure the FO has
* In this case the grant agreement should specify
an indicative grant amount in US$ net of IFAD`s sufficient time to review B/R reporting and
management fee. The actual US$ amount will be conduct any necessary verifications before
determined based on the spot exchange rate applied reporting to the donor.
by the bank upon receipt of funds. The US$ grant
amount in FXC will be adjusted accordingly, once the
final tranche have been received from donor and the
actual US$ amount determined by the bank.

2 Where possible, it is recommended that the agreement between IFAD and the supplementary fund donor, particularly in the
case of EC agreements, is negotiated in parallel with the agreement between IFAD and the implementing partner to avoid the
possibility of inconsistencies between the two.

148
17. European Union (European Commission). 19. Audit and financial reporting. IFAD applies FM
Variable/incremental costs directly attributable procedures for accounting, internal controls,
to project actions (e.g. hiring a support audit and financial reporting to all loans or
accountant or grant officer, and office and grants funded by supplementary funds or
equipment costs – at project level) should under other umbrella frameworks. However,
be included as a direct cost and specified in certain donors may impose additional and
annex 1 of the FA. FOs should foresee variable/ possibly more complex requirements. FOs
incremental costs for inclusion in annex 1 must make project staff and recipients aware of
at the negotiation stage with implementing all requirements, including of any additional
partners. This will avoid these expenditure reporting and/or audit requirements, as well
items being claimed against the indirect cost as missions to be conducted. For example, the
allowance during implementation. In line with European Commission, under the Financial and
the supplementary funds self-funding principle, Administrative Framework Agreement (FAFA),
IFAD generally charges the full indirect cost may call for various types of audit reviews:
allowance, which is 7 per cent of total direct pillar assessments and verification and anti-
costs. FOs should also note that of the indirect corruption missions. Residual error-rate studies
costs claimed under any EC agreement, IFAD’s (on transactions of closed projects) and audits
Budget and Organizational Development Office may be performed by the European Court of
allocates 1 per cent as a risk reserve. Auditors, private external auditors or other EC
auditors in decentralized offices or in Brussels.
18. FMA during supervision. Donors may
The FAFA and the EC agreement are provided
identify specific items for review during IFAD
as exhibit L-1.
supervision missions. Other requirements may
include: mandatory participation by the donor;
a higher frequency of supervision missions;
or differing evaluation procedures to be
applied. Compliance with these requirements
is mandatory based on the terms of the
supplementary donor agreement.

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KEY DOCUMENTS
MODULE M
Module M
Key documents

152
Introduction

1. Article 7, section 1(c), of the Agreement 3. The following policies, guidelines and
Establishing IFAD1 stipulates, “The Fund shall manuals are also available to the Fund, B/R
make arrangements to ensure that the proceeds and/or various project parties to support
of any financing are used only for the purposes implementation of loans and grants:
for which the financing was provided, with
• Loan Disbursement Handbook for
due attention to considerations of economy,
IFAD Directly Supervised Projects
efficiency and social equity.”
• Policy for Grant Financing and grant
2. Most of these arrangements are set out in
agreement
the following official documents governing
the use of resources and the conditions of • IFAD Policy on Preventing Fraud and
IFAD financing: Corruption in its Activities and Operations

• General Conditions for Agricultural • Project Procurement Guidelines


Development Financing (‘General • IFAD Procurement Handbook
Conditions’)
• Operational Procedures for Project and
• Policies and Criteria for IFAD Financing Programme Audits
• General Provisions Applicable to IFAD Large • IFAD Guidelines on Project Audits
Grant Agreements (schedule 6 of Large Grant
Agreements) • Implementing Procedures for European
Commission Financing
• Financing agreement (exhibit E-1)
4. These policies, guidelines and procedures are
• Grant agreement (exhibit K-2 Guidance mandatory, unless indicated otherwise in the
on sub-recipients/K-3 Guidance on Eligible relevant documents. Detailed instructions on
Expenditure Categories and Budget the majority of these procedures are contained
Justifications) elsewhere in this manual.
• Letter to the B/R2 (exhibit E-6)
• Contribution agreement between IFAD and
donor (for supplementary funds)
• Financial and Administrative Framework
Agreement (FAFA) (exhibit L-1) and Pillar-
Assessed Grant or Delegation Agreement
(PAGoDA) (exhibit L-2)

1 Available at www.ifad.org.
2 When a CI is involved in a project, a cooperation agreement and letter of appointment spelling out the CI’s responsibilities are
also signed.

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DOCUMENT RETENTION
MODULE N
Module N
Document retention
• Policies at IFAD
• Policies for the Borrower/Recipient

156
N.1 Policies at IFAD
1. Loan and guarantee agreements. IFAD retains 4. Paperless/electronic documentation. Where
the original copies of FAs and any amendments projects provide WAs, summary sheets, forms
in its permanent records. and supporting documentation electronically
in paperless form, IFAD will retain these
2. Withdrawal applications and supporting
electronically. For electronic documents of
documents. When the B/R sends the original
projects financed or cofinanced by the European
WAs and supporting documents to IFAD (or to
Commission, the period will be 10 years.
the CI, if applicable), they should be retained
until such time as no further queries regarding 5. Billing statements. IFAD does not retain hard
loan use are anticipated. The recommended copies of its billing statements, as they are
minimum retention periods are: available electronically from FXC.
(a) Original WAs, summary sheets and 6. Disbursement notices. IFAD retains copies of
supporting documentation: five years after debit advices until one year after the financing
the financing closing date; and closing date. Other reports are retained only as
long as judged necessary by ACD.
(b) Supporting documents: one year after the
loan closing date (or five years after the 7. Correspondence. IFAD retains any substantive
closing date if the documents have been correspondence in its records for a minimum
filed with the original WAs). of three years after issuance of the PCR. For
projects under the supervision of a CI, the
3. For projects under the supervision of a CI,
CI should retain substantive correspondence
documents should be available for review by
on significant issues until no further queries
IFAD on request, should the Fund wish to verify
with regard to project implementation are
the adequacy of CI review processes.
anticipated. This requirement is normally
satisfied if the correspondence is retained for
one year after issuance of the PCR.

N.2 Policies for the borrower/recipient


8. GC section 9.01 states that the B/R and other
project parties are to “… maintain separate
accounts and records in accordance with
consistently maintained appropriate accounting
practices adequate to reflect the operations,
resources and expenditures related to the Project
until the Financing Closing Date, and shall retain
such accounts and records for at least ten (10)
years thereafter.”

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