Loan Administration

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East and Southern Africa Loan Administration

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Loan Administration

  1. 1. LOAN ADMINISTRATION Dec 2010
  2. 2. Table of Contents Loan Administration Principles & Framework ……………….…..3 – 12 Letter to the Borrower/ Disbursement Handbook ……..….…….13 – 17 Disbursement Procedures…………………………………………18 – 32 Withdrawal Applications ……………………………………….…..33 – 46 Foreign Exchange Translation...................................................47 – 52 Closing of Loan & Project ……………………….……......……….53 – 62
  3. 3. Loan Administration Principles & Framework
  4. 4. Basic Principles of Loan Administration Only Eligible expenditure:proceeds of financing shall be used only for purposes for which financing provided Due attention & consideration to economy, efficiency & social equity Expenditure is eligible as & when incurred: Advance payments made by project other than contractual advances are ineligible First withdrawal: First withdrawal from loan/ grant account is made normally only after financing is effective & disbursement conditions met Written application: Borrower can request for withdrawal only by means of written application in specified format along with relevant supporting evidence
  5. 5. Basic Principles of Loan Administration Eligible expenditure: the following conditions should be met: Incurred by project party During project implementation period Reasonable cost of goods & services procured Per procurement procedures as per Schedule 4 of FA/ LTB Per approved AWPB Per percentages stated in Schedule 2/ LTB against eligible categories Not prohibited by UNSC under Chapter VII of UN Charter Not following any coercive, collusive, fraudulent or corrupt practice Per financing agreement documents Retroactive Funding: If Schedule 2 of FA expressly provides for retroactive funding, eligible expenditure incurred for project purposes before financing effectiveness can be reimbursed from loan account after effectiveness Letter to the Borrower/ Disbursement Handbook: Sent by IFAD to AuthorisedRepresentative of Borrower outlining important financing provisions, disbursement procedures & guidelines
  6. 6. Basic Principles of Loan Administration Disbursement process in IFAD: On receipt of Withdrawal Application (WA), the following steps are taken: ProgrammeManagement Division (PMD) verifies WA for completeness of documentation & eligibility of expenditure PMD approves WA & issues Payment Instructions & forwards to Loan & Grants Section of Financial Services Division (CFS) CFS may conduct independent verification of WA & sends approved Payment order to the Treasury Division to make payment CFS issues debit advice to Borrower & implementing agencies & generates billing statements on fortnightly basis Non approval of WA: IFAD informs Borrower about reasons for rejection & suggests corrective action to be taken
  7. 7. IFAD Project & Legal Documents Project Documents IFAD Generic Documents Loan & Grant Administration Operational Manual Loan Disbursement Handbook Procurement Guidelines Audit Guidelines Design Report Financing Agreement General Conditions Minutes of Loan Negotiations Amendments to Financing Agreement Letter to the Borrower (LTB)
  8. 8. Financing Agreement Schedule 2 - Allocation & Withdrawal of Financing Proceeds Category No. & description Loan amount allocated to each category % of expenditures to be financed Definition of terms Minimum withdrawal amount Statement of Expenditures (SOE) thresholds Retroactive Financing Conditions for first Disbursement on loan/ category/ component
  9. 9. IFAD Financing Denominated in Special Drawing Rights (SDR) Withdrawal applications made in different currencies Disbursement is converted in SDR & deducted from financing amount Financing Milestone Dates Board Approval Date Financing Agreement Date Effective/ Entry into Force Date Project Completion Date Loan Closing Date
  10. 10. Project Financing Agreement (New Version) Financing Agreement Date + generally 90-180 days EFFECTIVE DATE (Article VII) “X” anniversary of Effective Date PROJECT COMPLETION DATE (Article I) Project Completion Date to Loan Closing Date WINDING-UP PERIOD Project Completion Date + 6 months LOAN CLOSING DATE (Article I)
  11. 11. First Disbursement - requirements Financing declared effective/ entry into force Evidence of opening of Designated Account (DA) Letter on WA authorised signatories received Signatories of persons authorisedto operate DA & specimen signatures received Disbursement condition/smet AWPB & Procurement Plan approved Withdrawal Application in order (see checklist)
  12. 12. Parties Involved Borrower IFAD East & Southern Africa Division, including Nairobi regional loan administration unit & Country ProgrammeManager Loans Unit (Financial Services Division) Treasury International Banking Channels
  13. 13. Letter to the Borrower/ Disbursement Handbook
  14. 14. Letter to the Borrower/ Disbursement Handbook Letter to the Borrower/ Disbursement Handbook. . . Operational guidelines for withdrawal of loan/ grant funds for project purchases (procurement) of goods, works & consulting services, details of financial & audit reporting requirements Explained to the Implementing Agency during Start-up mission For new projects subject to revised General Conditions, Disbursement Handbook is an annex to revised Letter to the Borrower Includes prescribed forms to be used by Implementing Agency in withdrawing funds from loan/ grant
  15. 15. Letter to the Borrower/Disbursement Handbook . . explains the following topics: Disbursement Conditions (Opening of Designated Accounts, appointment of officers authorisedto operate DA & sign WAs, etc) Disbursement Procedures Designated Accounts Instructions for Withdrawal Annual Work Plan & Budget & Procurement Plan Allocation of Financing Proceeds Procurement of Goods, Works & Consulting Services, including Methods Review of Procurement Decisions by IFAD Programme Reviews & Periodic Assessments Financial Reporting & Auditing Project Completion/ Financing Closure Amendments
  16. 16. Disbursement Handbook – Topics Basic Principles & Financing Administration Instructions for Withdrawal Disbursement Procedures Statement of Expenditure Register of Contracts/ Contract Monitoring
  17. 17. Disbursement Handbook – Attachments Sample letter of evidence of authority to sign WA Instruction for completing forms The various forms for use with 4 Disbursement Procedures Initial Deposit Advance/Replenishment to Special/ Designated Account Direct payment procedure Special commitment procedure Reimbursement procedure SOE provision & eligibility Project Checklist – Form & Instructions in completing form Register of Contracts Status of Financial Statements & Audit Report
  18. 18. Disbursement Procedures
  19. 19. Disbursement Procedures Withdrawal of Loan Funds (Explained in the Letter to the Borrower) Special Account Procedure 1 Direct Payment Procedure 2 Disbursement Procedures Reimbursement Procedure 4 Special Commitment Procedure 3
  20. 20. Special/ Designated Account (Procedure I) A facility provided in Financing Agreement for advance funding from IFAD Initial Deposit/Advance – paid in USD or other freely convertible currency Replenishment applications should be submitted regularly using specified forms – usually on quarterly basis (see checklist)
  21. 21. Special/ DesignatedAccount General Special Account/Designated provisions are found in Article II/ Section B of Financing Agreement& in Section 4.08 of General Conditions Article II/Section B provides bank where Special/ Designated Account should be opened, amount & currency of Authorized Allocation/ Advance, mode of payment (e.g., full amount or tranches) & designated personsor office authorisedto operate Special Account Article IV deals with Loan Account & Withdrawals - Withdrawals from loan & grant accounts, special commitments, WAs, transfers, allocation & reallocation of financing proceeds, value dates of withdrawals, eligible expenditures & refund of withdrawals There are 3 stagesin operation of the Special Account during project life: Payment of Authorized Allocationor Initial Deposit Replenishment to Special Account Recovery of AuthorisedAllocation
  22. 22. Special Account Payment of AuthorisedAllocation (Initial Deposit)/Advance Review wording of disbursement conditionsin Schedule 2 of Financing Agreement/ LTB Ensure receipt of evidence of opening of SPA/ DA& Letter on authorized persons to operate account Check if opening of SPA is condition for effectiveness After IFAD payment, issue SPA letter The financing agreement may provide that authorisedallocation/advance is paid in 2 or more tranches During project implementation, authorisedallocation may be increased through amendment to financing agreement
  23. 23. Special Account Replenishment to Special/ Designated Account Check following items Exchange rateused Frequency of submission of WAs Adequacy of supporting documentation Correct use of summary sheets Replenishment during recovery period – should equal the balance of the agreed percentage of expenditures duly justified Exercise care in reviewing WA to determine which expenditures are eligible under SOE& which are subject to supporting documentation Usually minimum 20% of Authorised Allocation
  24. 24. Special Account Recovery of AuthorisedAllocation (Initial Deposit)/Advance Timing of recovery: monitor 2 trigger points,whichever comes first Percentage of recovery: to be confirmed by CPM Exchange rateto be used is historic rate at value date of payment of initial deposit Maintenance of SPA/ DA Initial Deposit/ Advance Recovery Control& reconciliation of unjustified balance with LGS At start of recovery – issue SPA/ DA Recovery Letter Amount for refund to IFAD Unjustified balance per IFAD records; not balance in bank Unjustified balance should be reconciled with LGS When the initial deposit is fully justified, any balance in bank should remain with Borrower & should not be refunded to IFAD; all future replenishments are processed as reimbursements to Government Loan account cannot be closed by IFAD if AuthorisedAllocation/ Advance is not fully justified or unjustified portion is not refunded to IFAD
  25. 25. Special Account/ Statement of Expenditures Special/ DesignatedAccount Statement of Expenditures Relates to funding Eligibility applies to all categories Relates to the submission of prescribed form in lieu of required supporting documentation Eligibility is limited to coverage provided in Financing Agreement or prescribed by IFAD
  26. 26. Special /Designated Account Reconciliation To be provided with every WA for Replenishment Reflects position of end of period covered by WA Should reflect all bank balances supported by bank statements as perSpecial/ Designated Account Reconciliation Format. Eachlineof SPA/ DA Reconciliation should be completed perNotes & Instructions enclosed
  27. 27. Direct Payment (Procedure II) Project instructs IFAD to make payment directly to a supplier, contractor, consultant, or any other third party Minimum of approximately $20,000 equivalent for each Direct Payment For payments below approximately $20,000, Project should useDesignated Account funds Documentation should show evidence of: Amounts due (invoice, statement or demand note) Initial or advance payments, progress payments on contract (as recorded on the contract monitoring form), progress certificate & invoice/ purchase order Note: Payment instructions in WA must be clear & complete
  28. 28. Special Commitment (Procedure III) Disbursement procedure for payment of goods covered under a Letter of Credit Stages / Processes Project opens LC & sends WA to IFAD, with copy of LC & contract (Form 301) IFAD sends SC Letter to bank of supplier as guarantee of payment (Form 302) Bank sends request for payment to IFAD when LC conditions are met (Form 303)
  29. 29. Special Commitment Procedure General A special withdrawal application (Form 301)is submitted by Project when agreed modality of payment for procurement of goods is through a Letter of Credit (LC) This WA is processed & reviewed using Checklist 3 for Special Commitment After processing by CPM, certified Checklist is forwarded to Nairobi office
  30. 30. Special Commitment Procedure Issuance of Special Commitment Letter Based on the certified Checklist, Nairobi office prepares a draft Special Commitment Letter (SCL), using Form 302 & sends it to finance division in Rome together with checklist for signature. LC details are duly reflected in the SCL. Completed SCL signed by Controller is mailed to negotiating bank (addressee of the SCL) with Form 303 as an attachment The value of the Special Commitment (the amount requested in WA Form 301) is converted into SDR using prevailing IMF rate as of preparation date & small percentage added to cater for exchange rate fluctuations SCLs that are issued for each loan/ grant are numbered sequentially Checklist is used to verify the steps in preparation & issuance of SCL
  31. 31. Special Commitment Procedure Payment Instructions on Special Commitments Once the terms of LC are complied with, negotiating bank sends request for reimbursementvia SWIFT to IFAD Treasury or through written request for payment (Form 303) Treasury sends SWIFT message of negotiating bank to Nairobi Office After completion of checking process, Payment Order (PO) to pay the negotiating bank is prepared using prescribed format for Special Commitment payment The Payment that is authorisedin PO is recorded in Special Commitment Payment Summary, quoting WA number & LC Reference Number
  32. 32. Reimbursement (Procedure IV) An expenditure pre-financed by Government or other sources Reimbursed by IFAD in currency of expenditure Reimbursement applications should be submitted normally within 3 months from date of payment
  33. 33. Withdrawal Applications
  34. 34. Forms Withdrawal Application Forms Application Summary Sheets Statement of Expenditure Forms. Register of Contracts Special/ Designated Account Reconciliation Statement Project WA Checklist IFAD WA Checklist
  35. 35. WA Forms Withdrawal Application – Form 100 Sequential numbering irrespective of disbursement procedure used All sections should be completed Payment instructions must reflect complete name & address of bank & beneficiary’s account number, including correspondent bank, if required
  36. 36. Application Summary Sheet Form 101-A (SA) & 101-B (Direct Payment/ Reimbursement to Government) For direct payment and for reimbursement of expenditures not eligible under SOE Supporting documents must be attached Form 102-A (SA) and 102-B (to Government) Prescribed form for expenditures eligible under SOE Supporting documents not required to be submitted; SOE form must be signed by designated Project staff
  37. 37. Supporting Documentation For expenditures that are eligible under SOE Prescribed SOE Form 102A or 102B, with certification text, duly certified by 3 designated signatories: Project Accountant, Project Coordinator & WA signatory For direct payment to a contractor, supplier or consultant Summary Sheet Form 101B, together with the following, as applicable: Copy of invoice (or Demand Letter, Statement), certified for payment by Project Coordinator Copy of contract(for 1st progress payment) or contract monitoring form Copy of purchase order Copy of bank guarantee, for advance payment &/ or performance Copy of delivery receipt for goods Copy of certification for works completed on civil works Copy of consultant’s report, if required, for final payment to be made Note: Since original copies of above documents are retained by PCU for audit purposes, a photocopy is accepted as supporting documentation
  38. 38. Supporting Documentation For replenishment to the Special/ DesignatedAccount The certified SOE form 102A, for eligible expenditures Summary Sheet Form 101A with copy of above documents (as applicable) plus evidence of payment (receipt or bank statement), for expenditures not eligible under SOE Special/ Designated Account Reconciliation Statement, together with Bank Statement by SPA/ DA holding bank For Special Commitment Copy of Letter of Credit opened by Project Copy ofcontract For all WAs, irrespective of disbursement procedure Project Checklist certified by Project Accountant & Project Coordinator Summary Breakdown by Category that adds up to WA amount Copy of CPM’s No Objectionto procurement of goods, works or consultancy services
  39. 39. SOE Procedure CPM sends official notification on SOE coverage to Borrower SOE arrangements specified in LTB Amendment to Financing Agreement not required for changes in SOE coverage/ thresholdunless SOE threshold is specified in Financing Agreement
  40. 40. Statement of Expenditure Provision in Financing Agreement The Financing Agreement provision for SOE is always found in Schedule 2 Items that should be taken into consideration SOE cases, taking into account whether threshold is applicable on contracts or expenditure The interpretation of the SOE coverage as provided in: (i) Financing agreement; (ii) Minutes of Loan Negotiation;or (iii) Agreement reached during Start-up Mission– giving particular attention to financial ceiling (usually $20,000) The types of expenditures normally fully eligible under SOE. Examples: Credit, Local training, Local salaries & allowances, Operating Costs & Civil Works on Force Account
  41. 41. Statement of Expenditure Prescribed SOE forms SOE Form 102A for replenishment to Special/ Designated Account SOEForm 102B for reimbursement of pre-financed expenditures Certification text is required for each SOE form 3 signaturesare always required: Project Accountant, Project Coordinator & WA Signatory Other items to take note of Relationship between SOE financial ceiling& procurement prior reviewthreshold Proper filing systemin PCU to enable audit trail during supervision missions Audit of SOE & separate opinionby independent auditor
  42. 42. For Prompt Disbursements Ensure (1) AuthorisedSignatories for WAs Banking Instructions, including correspondent bank Complete Supporting documentation Statement of Expenditure eligibility Procurement Procedures Terms of payment (contract payment terms) Currency of expenditure Correct % of financing Ensure (2) Disbursement conditions are met (Sch 2 of Financing Agreement) Withdrawal Application Size:Direct Payment: usually minimum approximately $20,000 Repl. to SPA/ DA: 20% of AuthorisedAllocation/ Advance (or more) Exchange Rate correctly calculated Accuracy of computations
  43. 43. Withdrawal Application Submission WA Contents Each WA submission should consist of the following Required supporting documentation Withdrawal Application Amount If final WA amount approved is lowerthan WA submission, PO can be released & Project is advised on reductions made If the final WA amount approved is higher than WA submission, Project should be advised on findings & corrections made (in practice WAs may be processed in reduced (not increased) amounts from what is indicated in Form 100. If amount payable is more than what is in Form 100, project is advised to claim in subsequent WA) A WA can be authorisedfor partial payment & balance paid in separate PO WAChecklist(Form 105)
  44. 44. Withdrawal Application Submission Withdrawal Application Form 100 The preparation & approval of WA at project level is a long process involving project staff & concerned officers in relevant Ministry The Project is required to submit prescribed Form 100signed by designated WA signatory WA without authorized signatureswill not be processed When a WA is not signed at all or only 1 of 2 required signatories signed, project is required to send new WA with required signature or signatures
  45. 45. Withdrawal Application Submission Written Communication Written Communicationfrom Project authority is required for the following: Change of WA authorized signatories– Original signed letter from representative of Borrower When PO already issued& payment was made on WA, Project’s request for adjustment in WA submitted – Original signed letter from Project Coordinator Confirmation on increase in WA amount as result of review Change in bank where Special Account is maintained Change of account number, in same bank, due to changes in bank’s system Confirmation of last WA submitted before closing of Loan Account
  46. 46. Withdrawal Application Submission Email Communication Email Communicationfrom Project authority is acceptable for the following: Change in the categoryto charge Information on correspondent bank or change in correspondent bank Any other relevant informationprovided by project relating to claim in WA Project should complete allsections in WA
  47. 47. Foreign Exchange Translation
  48. 48. Foreign Exchange Translation Usage of Exchange rates The usage of exchange rates in IFAD loans applies to one of the following areas: Conversion of IFAD financing in US Dollars (USD) to Special Drawing Rights (SDR) Conversion of withdrawals from loan accountbased on approved WAs submitted in various currencies into SDR For replenishment to Special Account, conversion of local currency expenditures funded from Special Account into currency denomination of Special Account, e.g. USD, Euro Conversion of amounts submitted through WAs as justification of authorisedallocation(initial deposit) to Special Account
  49. 49. Foreign Exchange Translation Conversion of IFAD Loan into SDR The IFAD loan is reflected in Design Report in US Dollars During financing negotiationsbetween representatives of Borrower & IFAD, US Dollar loan amount is converted into SDR using prevailing USD/ SDR rate at the end of month preceding loan negotiation Likewise, amounts allocated to each category are converted into SDR using same exchange rate Financing amount is fixed & is reflected in relevant sections of financing agreement If the project is partially financed from a grant, known as project-component grant, grant amount is also denominated in SDR SDR rate are listed on a daily basis by the International Monitory Fund& available through its website – www.imf.org
  50. 50. Foreign Exchange Translation Conversion of withdrawals made from Loan/ Grant Account Loans & project-component grants are denominated in SDR Disbursements from loan/ grant accountare made in currencies in which expendituresto be financed from loan/ grant proceeds have been paid or are payable Each withdrawal applicationthat is submitted by Borrower is paid in currency requested in WA& approved by IFAD The payment made is converted into SDR using prevailing rate as of value dateof payment, i.e., date of debit of IFAD’s bank account for equivalent amount of disbursement For withdrawal requests denominated in currencies other than USD, requests are converted first into USD using prevailing UN rate during month of payment thereafter converted & SDR as above
  51. 51. Foreign Exchange Translation Conversion of local currency expenditures funded from Special Account When preparing WA for replenishment to Special/ Designated Account, local currency expenditures are converted into denomination of Special Account, using prevailing rate at time of transfer of funds from Special Account to Project Operating Accountin order to recoup actual value of transfer made One of the tools to be used by Project in monitoring special accounts movements & operation is Special/ Designated Account Reconciliation Statement. This statement is submitted with each WA for replenishment to Special/ Designated Account
  52. 52. Foreign Exchange Translation Conversion of WAs used as Justification (or Recovery) of Initial Deposit/ Advance to Special/ Designated Account 2 trigger pointsfor start of justification of initial deposit/ advance to Special/ Designated Account; whichever comes first shall be applied: 6 months before Project completion Date, or When undisbursed balance of financing, less outstanding Special Commitments, is equal to twice the amount of AuthorisedAllocation When either of the trigger points is reached, each request for replenishment to Special/ Designated Accountwill be used partially or in full, as justification of AuthorisedAllocation/ Advance Exchange rate used for partial/ full justification is historic rate – rate at which authorisedallocation/ advance was paid
  53. 53. Closing of Loan & Project
  54. 54. Closing of Loan & Project Conclude execution of all service contracts to be financed by IFAD before Project Completion Date Review procurement plan Check table on physical & financial execution of contracts Propose solutions that facilitate complete execution of works Cancel contractsthat cannot be executed in allotted time Review inventory of fixed assets List of assets detailing: type, date of purchase, purchase value, residual value, recommended assignment or disposal Back-up of files and documents for 10 years Create database in-country Secure files – keep under lock & key! Project Completion Report, lessons learned, evaluations & other future uses
  55. 55. Closing of Loan & Project Winding-up staff on completion date Review staff rosternoting provisional dates of contract termination Calculate staff compensation Verify availability of financing & national resources Positions generally maintained until financing closing date (6 months after project completion date): Project Coordinator Financial & administrative officer/accountant M&E Officer Person in charge of follow-up/evaluation Secretary Drivers & guardsas needed
  56. 56. Closing of Loan & Project Winding down 1 year before Project Completion Date (PCD): CPM informs Project of approaching PCD & remind of eligibility requirements 6 months before PCD: Start recovery of Special Account initial deposit Determine rate of recovery All activities must be completed by PCD On or after PCD: Monitor payments on contracts – determine eligibility Between PCD and Loan Closing Date (LCD)= winding up period: Project must send letter to CPM explaining plan of action & projected expenditures Monitor payments on contracts - only those completed by PCD are eligible Only winding-up expendituresare eligible
  57. 57. Closing of Loan & Project Eligibility Requirements for Expenditures Goods delivered; civil works completed; services rendered; on orbefore PCD Winding-up Expenditures (between PCD & LCD) Salaries & allowances of key project staff Operating Costs Project Completion Report costs Final audit reportfees
  58. 58. Closing of Loan & Project Loan Closing If additional time is required by Borrower to submit WA for eligible expenditures, Borrower should contact CPM to establish grace period CPM requests Loans Unit to keep loan account open to accommodate payment of late WAs
  59. 59. Closing of Loan & Project Procurement in Project Completion Process To ensure: closely review all goods are delivered/ works completed/ services rendered by project completion date: monitor final procurement plan& progress reports during last year of project take measures to facilitate completion of physical execution of contracts cancel contractsthat cannot be executed within completion date Ensure only contracts executed by project completion date are paid Ensure procurement files are complete& obtain missing documents from project Report on lessons learned & make recommendations for future projects
  60. 60. Closing of Loan & Project Recovery / Justification Each WA processed/approved as justification - partial or full : is not a disbursement from loan account is used as justification only is converted into SDRat rate used at value date of payment of initial deposit, i.e., historic rate Any amount of initial deposit that remains unjustified at closing date of Financing, is promptly refunded to IFADin currency used by IFAD for purpose of withdrawal from Loan Account Refund to be made to IFAD is unjustified portion of initial deposit - not balance in bank where Special Account is held
  61. 61. Closure of Loan Account Requirements SPA Initial Deposit is fully recovered / justified Last WA is confirmedby Project Authority to IFAD Project ensures all eligible expenditures are claimed for payment Final Audit Reportsubmitted Project Completion Report accepted by IFAD Undisbursed balance of financing is cancelled by IFAD
  62. 62. Thank You

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