Annex 1:

Description of the Action and its Context

AN INSTITUTIONNAL ASSESSMENT OF COUNTRY SYSTEMS CONCERNING PROVINCIAL AND DISTRICT ADMINISTRATIONS IN PNG Milne Bay provincial administration and administrations of all its districts: Alotau, Esa'ala, Kiriwina-Goodenough, SamaraiMurua PNG

Terms of reference for

Entity subject to the assessment: Location of the Entity:

Section 1: Contact Details

[The following contact details should be completed: The physical address, phone numbers, fax number, website and E-mail address of the entity; The contact details of senior officers and of key contact persons; The contact details of the Audit Task Manager and staff concerned in Finance, contract and operational functions at AIDCO headquarters or in the Delegation; The contact details of other relevant persons involved with the Action, for example: other partner donors or officers in national Ministries]

Entity : [full name of the entity concerned by the assessment]

Address Phone Website Contact 1 [indicate executive positions e.g. Director or General Manager] Name E-Mail Function Phone/Fax Country Fax

Contact 2 [complete and add more contacts where appropriate. Indicate Head of Finance and Accounting, project officers, etc ] Name E-Mail Function Phone/Fax

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Section 1: Contact Details (continued)

Delegation of the European Commission in PNG
Address The Lodge, Brampton street, PO BOX 76, Port Moresby +675 321 3544 Country PNG

Phone

Fax

+675 321 7850

Audit Task Manager Name THOMAS VIOT Function Trade and Economics coordinator +675 321 3544

E-Mail Contact 2 Name

Thomas.viot@ec.europa.eu

Phone/Fax

ROBERTO CECUTTI

Function

Head of Trade, Economics and Governance section +675 321 3544

E-Mail

Roberto.cecutti@ec.europa.eu

Phone/Fax

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Section 2:

Reason for the Assessment, Regulatory Context and applicable Assessment Criteria

(a) Context of the assignment

In accordance with the Paris Declaration on Aid Effectiveness, the Accra Agenda for Action (AAA), the PNG Commitment on Aid Effectiveness and the Cairns Compact, the PNG Government and the Development Partners (DPs) present in the country have committed themselves to improve aid effectiveness and notably increase the use of country systems when implementing development assistance. While providing Budget Support (BS) remains an important objective for the EU in PNG, the country is currently not eligible to BS and is likely to remain so in the medium term, mainly due to the level of non compliance with public financial management requirements. In order to increase the use of country systems, DPs and the PNG government agreed to conduct an institutional assessment of country systems with a view to both provide a baseline study of PNG government systems against jointly agreed international standards and develop a roadmap (capacity development plan) to support PNG to improve its government systems to international standards. However the government is committed to pursue decentralisation and has allocated increasing amounts of the national budget to provincial and districts administrations over the recent years. In addition, DPs also support decentralised administrations. The EU Support to Districts and Local Level Governments (SDLLG) project supports particularly the capacity building of district administrations as well as central agencies aiming at improving public financial management at decentralised levels. In view of the above the PNG Government and DPs have identified the need to focus the institutional assessment of country systems particularly on provincial and district administrations. The scope of the assessment will be structured around five essential criteria which encompass the whole functioning of country systems. DPs have jointly agreed on international standards of good practise against which a baseline of PNG country systems can be elaborated. The assessment will also provide sufficient information to inform the separate preparation of a Sub-national Public Expenditure Framework for Accountability (PEFA) assessment. In addition, the EU has specific requirements in order to delegate implementation tasks to third countries for the implementation of EU programmes, including their budgetary execution (Financial Regulation applicable to the 10th European Development Fund art. 21). Where the Commission implements the budget by decentralised management, it must first (art. 24 of the FR for 10 th EDF) obtain evidence of the existence and proper operation within the entities to which it entrusts the implementation. The five criteria that will structure the scope of the assessment are: 1. an effective and efficient internal control system for the management of operations, which includes effective segregation of duties of authorising officer and accounting officer or of the equivalent functions; an accounting system that enables the correct use of Development Partners funds to be verified and the use of funds to be reflected in the Development Partners accounts; an independent external audit;

2.
3.

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4. 5.

transparent procurement which are non-discriminatory and exclude any conflict of interest grant award procedures which are non-discriminatory and exclude any conflict of interest

FIRST CRITERION: EFFECTIVE AND EFFICIENT INTERNAL CONTROLS

The first criterion is based on international standards on internal control set by the Committee of Sponsoring Organizations (COSO) on monitoring internal control systems. These standards are widely accepted and codified into the national legislations of several developed countries. Therefore, the Auditor should take into consideration the requirements set in the COSO guidelines for monitoring and assessing internal control systems. The assessment against these standards should ensure that there is sufficient information collected to allow a separate assessment against Public Expenditure Framework for Accountability (PEFA) indicators relating to predictability and control in budget execution (indicators PI-13 through PI-15, PI18 and PI-20 to PI-22) as modified where applicable by the Guidelines for application of the PEFA Performance Measurement Framework at Sub-national Level (2008). In addition, for EU internal purposes, the Auditor should also take into consideration the requirements concerning internal control of the EU Financial Regulation for General Budget, in particular article 28a and relevant articles of the Implementing Rules, with a view to determining to what extent EU requirements go beyond international benchmarks and without taking these aspects into account in the definition of the roadmap. The minimum requirements for this criterion include:
Control Environment

The control environment sets the tone of an organization, influencing the control consciousness of its staff. It is the foundation for all other components of internal control, providing discipline and structure. Control environment factors include the integrity and ethical values of management and staff, including a supportive attitude towards internal controls throughout the organisation, the organisations commitment to competence, the tone at the top (i.e. management's philosophy and operating style), the organisational structure, as well as human resources policies and practices.
Risk Assessment

Every entity faces a variety of risks that must be assessed. Risk assessment is the process of identifying and analysing the relevant risks to the achievement of the entitys objectives, and determining the appropriate response. It implies (i) risk identification, (ii) risk evaluation, (iii) assessment of the reaction to the risks of the organisation and (iv) development of responses to the risks (accepting, avoiding, treatment or termination).
Control Activities

Control activities are the policies, procedures and actions established to address risks and to achieve the entitys objectives. Control activities occur throughout the organization and include a range of detective or preventive activities as diverse, for example, as authorisation and approval procedures, segregation of duties, control over

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security of assets, verifications, reconciliations, reviews of operating performance and operations, or supervision.
Information and Communication

Information and communication are essential to realising all internal control objectives. Information systems produce reports, containing operational, financial and compliance-related information, that make it possible to run and control the organisation. The organisations ability to make appropriate decisions is effected by the quality of information which implies that the information should be appropriate, timely, current, accurate and accessible. Effective communication should flow down, across and up the organization. All personnel should understand their own role in the internal control system, as well as how individual activities relate to the work of others. They must have a means of communicating significant information upstream. There also needs to be effective communication with external parties.
Monitoring

Internal control systems need to be monitored to assess the quality of the system's performance over time. Monitoring is accomplished through ongoing monitoring activities, separate evaluations or a combination of both. Ongoing monitoring occurs in the course of operations and includes regular management and supervisory activities, and other actions personnel take in performing their duties.

SECOND CRITERION: ACCOUNTING

The second criterion uses the international standard on cash accounting set by the International Public Sector Accounting Standards (IPSAS) issued by the International Federation of Accountants (IFAC) entitled Financial Reporting under the cash basis of accounting. The Auditor should take into consideration the requirements set in the IPSAS for monitoring and assessing public accounting systems. The assessment against these standards should ensure that there is sufficient information collected to allow a separate assessment against Public Expenditure Framework for Accountability (PEFA) indicators relating to accounting, recording and reporting (indicators PI-16 and PI-17 and PI-23 to PI-25) as modified where applicable by the Guidelines for application of the PEFA Performance Measurement Framework at Sub-national Level (2008). In addition, for EU internal purposes, the Auditor should also take into consideration the requirements concerning accounting of the EU Financial Regulation for General Budget and relevant articles of the Implementing Rules, with a view to determining to what extent EU requirements go beyond international benchmarks and without taking these aspects into account in the definition of the roadmap. The minimum requirements for this criterion include:

(a) Completeness of the financial statements comprising: A statement of cash receipts, cash
payments and cash balances

(b) Accounting policies and explanatory notes, and (c) A comparison of budget and actual amounts

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periodicity - The financial statements should be prepared at regular intervals of time (generally a period of 12 months at least). clear identification - the financial statements should be easily identifiable (i.e. if the financial statements are published as a part of a larger report, the readers should be able to distinguish them clearly from the other documents ; the reporting and economic entity covered should be clearly identified, the period covered and the currency used should be clear, etc). consistency - the financial statements should be presented in a consistent manner with those of the previous reporting period (i.e. using the same accounting rules and presentation, and if these have changed the impact of the change should be clearly disclosed). comparability - the financial statements should be presented with comparative financial information (for example comparative numbers of the previous financial period). going concern - the financial statements should be prepared under the going concern accounting convention (i.e. assumption of continuation of the activities). When this is not the case, it should be disclosed in the financial statements. no offsetting - assets and liabilities of a different nature should not be offset with each other, unless immaterial. Revenue and liabilities of a different nature should not be offset with each other, unless immaterial. fair presentation - the financial statements should be fairly presented, i.e. they should be a faithful representation of the transactions, events and conditions in accordance with the accounting framework used for preparing them.

THIRD CRITERION: EXTERNAL AUDIT The third criterion uses the international standards on external audit set by the International Organization of Supreme Audit Institutions (INTOSAI). Therefore, the Auditor should take into consideration the requirements set by the INTOSAI for monitoring and assessing external audit systems. The
assessment against these standards should ensure that there is sufficient information collected to allow a separate assessment against Public Expenditure Framework for Accountability (PEFA) indicators relating to external audit (indicators PI-26 and PI28) as modified where applicable by the Guidelines for application of the PEFA Performance Measurement Framework at Sub-national Level (2008). In addition, for EU internal purposes, the Auditor should also take into consideration the EU requirements concerning external auditing of the financial regulations, in particular article 35(6) of the Implementing Rules, with a view to determining to what extent EU requirements go beyond international benchmarks and without taking these aspects into account in the definition of the roadmap. The minimum requirements for this criterion include:
Ethical standards

Integrity, objectivity, independence: In order to sustain public confidence, the conduct of auditors should be above suspicion and reproach. They may not perform activities incompatible with the practice of public auditing. Their work should be performed with objectivity and impartiality. Opinions and reports should be based exclusively on factual evidence assembled in accordance with the auditing standards. Auditors should be

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independent from the audited entity and have no conflicts of interests in performing their work. Professional competence and due professional care: Professional auditors should possess the competence to perform the work and maintain their competence through programmes of continuing education. They are required to perform their work with due professional care. Confidentiality: Professional auditors must respect professional secrecy regarding the information obtained about their clients during the course of their services.
Standards of work performance

Planning, risk assessment and response to assessed risks - The audit work should be duly planned. The auditor should assess the risks of material misstatement of the financial statements and must design his audit procedures in response to the assessed risks. The risks assessment should consider the internal controls of the audited organisation and the risks of fraud. Audit evidence - In performing his audit, the auditor must obtain evidence to support his audit opinions. The auditing standards discuss the nature of the audit evidence (for example, observation of assets, external confirmations, examination of documentation, analytical procedures, subsequent events, management representations, etc). The nature and extent of the evidence obtained should provide reasonable assurance of the adequacy of the audit opinion. Documentation - The auditor must document his work in writing in his working papers. Supervision and quality control - The work of the audit assistants should be duly supervised and the auditor must implement a quality control system of his work.
Standards of reporting

The pronouncements on audit reports foresee several types of possible reports and the pronouncements may differ between ISA or INTOSAI or GAGAS. In all sets of standards the report should be clear, to the point, and exempt from superfluous details. In all sets of standards, an opinion report should include the following basic elements:

(a) to whom it is addressed (b) a clear identification and description of its subject matter (for example, an identification
of the financial statements being audited)

(c) a statement to identify the responsible party of the subject matter and to describe the
responsible partys responsibility and the auditors responsibility (for example, who is responsible for preparing the financial statements under audit)

(d) an indication of the standards under which the audit has been performed (e) a description of the nature and scope of the work (f) the opinion of the auditor about the subject matter (for instance, whether the financial
statements are fairly stated, or whether a contractual provision has been complied with). The assurance provided in the opinion should be related to the scope of the work and to the audit evidence obtained (for instance, where a limited scope work was performed, only a limited assurance can be given)

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(g) the date of the report (h) the identification of the auditor issuing the report and signature. FOURTH CRITERION: PROCUREMENT
The fourth criterion uses the OECD-DAC Common Benchmarking and Assessment Methodology for Public Procurement Systems. Therefore, the Auditor should take into consideration the requirements set by the OECD-DAC Common Benchmarking and Assessment Methodology for Public Procurement Systems. The assessment against these standards should ensure that there is sufficient information collected to allow a separate assessment against Public Expenditure Framework for Accountability (PEFA) indicator 18 relating to procurement as modified where applicable by the Guidelines for application of the PEFA Performance Measurement Framework at Sub-national Level (2008). In addition, for EU internal purposes, the Auditor should also take into consideration the specific EU main requirements for this criterion included in Title V of the Financial Regulation for General Budget and Title IV of the Financial Regulation for EDF,with a view to determining to what extent EU requirements go beyond international benchmarks and without taking these aspects into account in the definition of the roadmap. AusAid conducted in 2010 a general procurement assessment in PNG using the OECD-DAC methodology and another one in the education sector, including Milne Bay province, against World Bank/AusAid benchmarks. Therefore the Auditor is expected take into due account these two assessments and to focus particularly on the procurement practices at provincial and districts level. The minimum requirements for this criterion include:
Transparency

In the legal texts of many international institutions, transparency is mentioned as a key principle for appropriate contract awarding procedures. The application of this general principle notably entails that:
Publication

Appropriate publication at all stages of the procurement process must be ensured (tender notice, award notice). The tender publication must indicate clearly the terms and specifications of the tender and the conditions of the contract. These terms and conditions should not change during the procurement process. To ensure adequate implementation of these principles, reference to the minimum information that must be published should be specified, as well as the way in which the publication must be done. This should also include guidelines about the information and documents which must be provided with the invitation to tender (for example the selection, exclusion, evaluation and award criteria).
Contacts between the contracting authority and the candidates

While the procurement procedure is under way, contacts between the contracting authority and the candidates must be made in a transparent way. The circumstances and conditions under which such contacts may (or may not) be made should be specified.

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Transparency of the award decision

The decision taken during the evaluation of the proposals should be recorded in writing. The minutes of this decision should include minimum information about each candidate declared to satisfy the requirements, and the quotation obtained by each candidate according to the award criteria published with the invitation to tender. The award decision should be published.
Non-discrimination and equal treatment

The principle of non-discrimination aims at ensuring an equal access and treatment of all tenderers and potential tenderers. Common aspects that appear to be often accepted by the above-noted institutions are:
Equal access

The contracting authority should establish criteria and publish information which gives to all potential suppliers an equal opportunity to compete. A locally established supplier should not be treated less favourably than another locally established or a foreign supplier. The technical and other specifications of the tender should not have the effect of creating unjustified obstacles to competitive tendering and international trade.
Equal treatment

For the evaluation of tenders the contracting authority should establish measures to ensure fair, objective and impartial treatment of all the tenders.
Use of tendering procedures

The financial regulations of the above-noted international institutions mention the use of tendering procedures as a key principle for appropriate procurement. Tendering procedures set the framework, conditions and measures to ensure that the overall principles of transparency, equal treatment and best value for money are respected during the implementation of the procurement process. With that aim, the tendering procedures can generally address various subjects:

(a) The description of the procedures to be followed; (b) The circumstances under which each type of procedure must be applied; (c) The measures to ensure that the procedure used are commensurate to the nature and
value of the procurement being made (different types of procedures more or less formalised, depending on the circumstances), including the possibility to use alternative procedures under specific circumstances;

(d) The methods of solicitation or invitation to bid; (e) The publicity measures that need to be followed; (f) The method of presentation of the tenders ensuring their confidentiality; (g) The deadlines for submission and opening of tenders, which ensures that reasonable time
is set for the presentation of the tenders;

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(h) The functioning of the evaluation/contract award procedure; (i) The regulation of contacts when the procedure is under process; (j) The appointment, role, functions and operation of tender committees and evaluation
committees, and the measures taken so that the members of such committees are independent from each other;

(k) The existence of legal remedies for the procurement procedures.

Absence of conflict of interest

The contracting authority should establish measures to ensure that the evaluation process is exempt from any conflicts of interests or other influences.
Penalties and sanctions

An adequate use of tendering procedures should be supported by adequate specification of the sanctions applicable in case of incorrect or irregular application of the procedure, as well as in cases of fraud or corruption during the procurement process.
Best value for money

The general principle of economy and efficiency and best value for money in the public procurement procedures can be found in the texts of the above-noted international institutions. This principle entails that the contract is awarded to the tender which, in terms of the specific evaluation criteria set forth for the tender, is determined to be the most advantageous. This may not necessarily mean the tender with the lowest price but it may mean the tender with be best balance between quality and price.

FIFTH CRITERION: GRANT AWARD PROCEDURES

The Auditor should take into consideration the EU requirements for this criterion included in Title VI of the Financial Regulation for General Budget and Title VI of the Financial Regulation for EDF. The minimum requirements for this criterion include:
Main principles

Grants shall be subject to the principles of transparency and equal treatment. With a view to ensuring the observance of those principles, grants are subject to ex ante and ex post publicity rules. Grants may not be cumulative or awarded retrospectively and they must involve co-financing. In no circumstances shall the same costs be financed twice by the budget. On no account may the combined total costs eligible for financing be exceeded. Grants may not have the purpose or effect of producing a profit for the beneficiary.
Grant award procedure

The grants shall be implemented through the publication of calls for proposals. Grant applications shall be submitted in writing.

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Proposals shall be evaluated, on the basis of pre-announced selection and award criteria, with a view to determining which proposals may be financed. The selection criteria shall be such as to make it possible to assess the applicant's ability to complete the proposed action or work programme. The award criteria announced in advance in the call for proposals shall be such as to make it possible to assess the quality of the proposals submitted in the light of the objectives and priorities set. The applicants shall be informed in writing of the decision on their application. If the grant requested is not awarded, the entity shall give the reasons for the rejection of the application, with reference in particular to the selection and award criteria already announced.
Payment and control

The amount of the grant shall not become final until after the entity has accepted the final reports and accounts, without prejudice to subsequent checks by the entity. Should the beneficiary fail to comply with his obligations, the grant shall be suspended or reduced or terminated after the beneficiary has been given the opportunity to make his observations.
Implementation

Where implementation of the action requires the award of procurement contracts by the beneficiary, the relevant procedures shall be as set out. Each grant decision or agreement shall provide expressly for the Commission and the Court of Auditors to exercise their powers of control, on documents and on the premises, over all contractors and subcontractors who have received Community funds.

ASSESSMENT OF THIRD PARTY SYSTEMS

If the Entity further delegates some tasks e.g. to the local government bodies or agencies, which will be using their own procedures, different from the procedures of the Entity, it is necessary to verify how those third party procedures are controlled. The auditor's analysis should be based on the questionnaire's section: Application of the standards at the implementing partner/project level for each of the pillars. The auditor should analyse how the Entity controls and uses the third party systems and report on any corrective measures which may need to be taken by the Entity before it can be entrusted with the budget implementation tasks in the decentralised management mode.

Section 3: General reference documents (a) Legal framework

The PNG Public Financial Management Act. The Financial Regulation: Council Regulation No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities (OJ L248 of 16/09/2002) as amended on 1 May 2007. The Implementing Rules: Commission Regulation of 23 December 2002 laying down detailed rules for the implementation of Council Regulation No 1605/2002 on the Financial

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Obtain target Discuss and Consolidated Collect Distribute AAPs Directorates populations and publish Delegation EuropeAid process adopt andAAPs out Delegation EuropeAid AAP carry final A-D (risk) analysis consolidated (draft/final) & AAPs AAP prepare & EuropeAid.05 AAP draft consolidated EuropeAid

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Regulation applicable to the general budget of the European Communities (OJ L357 of 31/12/2002) as amended on 1 May 2007. The Financial Regulation of 18 February 2008 applicable to the 10th European Development Fund (OJ L 78/1 of 19 March 2008).

Section 4: Entity concerned by the assessment

The entity is the Milne Bay provincial and districts' administrations in PNG. The assessment will be performed at the Milne Bay provincial administration in Alotau and in each of the four district administrations in the province: Alotau, Esa'ala, KiriwinaGoodenough, Samarai-Murua.

Section 5:

Other Information and Sources

For further information on the entity, see: This section should present and describe other information that has or may have a significant impact on the assessment and the sources or documents from which this information can be obtained.

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