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					                  REPUBLIC OF BULGARIA
                  NATIONAL AUDIT OFFICE

                            REPORT

                               on

Results from the financial management audit and implementation
of Project 9906 - Sofia Water, Waste Water Project carried out at
CFCU and recommendations on improvement of the projects'
management.

Pursuant to order P-65 of 28.05.2002 of the Chairman of the
National Audit Office, an audit was carried out of the
implementation of PHARE Project BG 9906 – Sofia Water, Waste
Water Project at CFCU in accordance with the Financial
memorandum, signed on 30.12.1999 between the Commission of
the European Communities and the Government of the Republic of
Bulgaria.

The audit report with the findings and recommendations was
submitted to the Minister of finance on January 24, 2003.

The report on the audit results of Project BG 9906 was adopted
with a decision, taken at a meeting of the NAO on 6.03.2003.

1. Audit Objective

Evaluation of the lawful and expedient absorption of funds,
committed for implementation of Project BG 9906. Expressing
opinion on the financial management, efficiency of management
control, compliance of the project objectives with the EU
Regulations and the national priorities, economy and efficiency in
achievement of the objectives and expected impact.

The findings and evaluations made in the report are designed for
the management of the auditee and other interested institutions.

2. Brief description of the auditee
Large-scale Infrastructure Facility – Part 5 is a horizontal
programme of the European Union for Bulgaria and the other
associated countries, aimed at financing environmental projects.
The overall goal is to support this country’s efforts in the course of
preparation for accession.

Pursuant to Art. 3 “Terms and Duration” of the FM, all contracts
must be concluded by 31.12.2000 and all payments effected by
31.12.2003.

Due to delays accumulated during the preparatory stage and the
short time for approval of the contracts, an extension was
requested of the deadlines under the Financial Memorandum;
according to letter of 09.02.2001 of the EC Delegation, the
contracting period under Project BG 9906 was extended by three
months (until 31.03.2001) and the payment deadline – by 12
months.

Under the Financial Memorandum, the budget of Project BG
9906 amounts to EUR 23, 000,000.00.

The initial allocation of funds by projects was as follows: BG 9906
01 Rehabilitation and Upgrade of the Sofia Waste Water
Treatment Plant EUR 22.4 million; BG 9906 02 Supervision – EUR
0.6 million.

The PHARE Programme funds actually contracted amount
to EUR 17,899,950.35 (without co-financing by Sofia
Municipality)

The tender for selection of the GKW consulting firm to prepare the
tender dossier was held in Brussels. The Bulgarian party was only
partially involved in this process and had no opportunity to request
a commitment from the consultant vis-à-vis the subsequent
project outcome. An EC consultant prepared a strongly inflated
preliminary assessment of the budget of the full scope of project
works in the amount of EUR 34,173,070, incl. EUR 700,000 for
supervision.

Due to the fact that the funds appropriated under the financial
memorandum were EUR 23 million and no co-financing was

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provided in the amount required, the SWWTP Project was divided
into two parts. Later, after the conclusion of the tender procedure,
an attempt was made to absorb the balance of EUR 5,074,066.17
applying the procedure of direct contracting and drawing up of
Addendum № 1 to the already signed contract with the selected
Contractor. According to protocol of negotiations, held on
24.12.2000 between the CFCU Executive Agency (EA) and the
Sofia Municipality (SM) on one hand and the selected contractor
on the other, it was proposed to contract supplementary facilities
and equipment within the limits of the remaining project budget.
The Addendum signed was sent to the EC Delegation on
27.12.2000, which declined to endorse it quoting lack of technical
grounds to apply such a procedure.

There are some omissions and risks, which were not taken into
consideration in the implementation of the project, which created
prerequisites for a limited absorption of the allocated funds under
the FM and lead to an inability to offer the whole scope of
necessary construction works.

2. Project Objective

The objective of Project BG 9906 is to upgrade the systems of
water supply and waste water treatment of Sofia.

This objective is expected to be attained through the following
main construction works and supply of equipment as specified in
FIDIC’s Conditions of Contract (Orange Book), in conformity with
Bulgarian legislation.

The construction contract includes: new construction of: a fuel
oil chamber, three grit channels, a distribution and flow
measurement chamber, two secondary sedimentation tanks, a
sludge draw off chamber, a sludge pump station, a return
activated sludge pumping station; rehabilitation works: on the
inlets, on the aeration system of the aeration tanks – tanks № 2,
3, 4 and 5; delivery of new blowers, replacement of electrical
fittings by new heavy current cables and transformers.

3. Findings



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4.1.  Project     BG   9906-01-01-0002     Upgrade    and
Rehabilitation of the Sofia Waste Water Treatment Plant

On 29.12.2000, in conformity with the tender held and based on
the preliminary agreement submitted for a consortium dated
24.11.2000, an implementation contract was concluded with the
companies Va Tech Wabag Kulmbach of Germany and
Hydrostroitelstvo Gorubliane LTD, of Bulgaria.

The Contract is in conformity with the FIDIC terms,
Orange Book regarding design, construction and turnkey transfer
and in accordance with Bulgarian legislation.

The overall contracted            value    amounts       to   Euro
17,299,950.35.

Under the contract the implementation time is 24 months, starting
25.01.2001 and the defect liability period is 12 months.

A notarised and stamped letter of 29.03.2001 was submitted
regarding new registration and consolidation of one of the parties
to the contract, according to which Va Tech Wabag Kulmbach was
renamed Va Tech Wabag Deutschland GmbH &Co.KG, and
assumed responsibilities regarding implementation.

Overall, as at 05.11.2002, funds in the amount of Euro
4,214,775.37 have been approved and paid out, which
represents 24.36% of the project budget, provided by the
PHARE Programme, amounting to EURO 17,299,950.35.
These amounts correspond to the abstract from the Perseus as at
the same date.

The project is in a process of implementation. Delays in
implementation are evident, for which the following prerequisites
have contributed:

Different institutions and units are involved in the implementation,
management and supervision of the project, which creates
difficulties for normal communication: CFCU - IA, Joint Project
Implementation and Management Unit (JPIMU), Sofia Municipality,



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Unit for Implementation and Monitoring of Projects under EU pre-
accession, National Construction Control Directorate (NCCD).


The tender project, developed by the GKW consulting company,
based on which offers were made, is not linked to commitments
for the subsequent approval of the technical project. This lead to
reflection of the omissions made (particularly in the technological
scheme), to later failures and overlapping in design, as well as in
the organization of construction;

The tender documentation presented does not clarify conclusively
the issue of possible halting of the SWWTP in the process of
implementation for a maximum of 5 consecutive days (volume II,
section 13 of the final tender documentation) and its non-
conformity to the provisions of section 8 regarding “ensuring non-
stop operation during the implementation stage at the current
capacity and efficiency”. In its letter under their reg. № 08-00-
1350/12.03.2002 the MEW have stated that “halting the operation
of the plant for 5 consecutive calendar days and channelling
untreated sewerage and industrial waters from the city of Sofia
directly into the Iskar river would cause an environmental
disaster”. This was the reason for the Contractor to request and be
granted an extension of the contract term.
Existence of omissions and inconsistencies in the technical
specification, as well as an incomplete scope of the mandatory
works, which have to be remedied for acceptance and signing of
Protocol 16. These circumstances, reflected in a report of the
Supervisor of September 2002, allow opportunities for different
interpretations and/or requests for additional funds;
Delays of the actual start of construction works after obtaining the
respective permits (one month in the case of temporary works,
more than a month in the case of repair works and full-scope
works);
Unjustified delays exist in the course of design and implementation
of the project, as well as non-stop changes and resulting delays
for the construction calendar schedule – in about 71% of the
contractual term of implementation the value of the works
performed was about 21.46% (incl. the 6-th certificate and the
works on administrative order № 2). The delays established are

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related mainly to drawing up the working designs for the sub-
projects, the clearance process, problems in negotiations with sub-
contractors, inefficiency in the work of the representative of the
Contractor, lack of progress in implementation, of which also the
DEC was notified.
Discrepancies between the 4.1 clause of FIDIC (orange) and the
Bulgarian legislation – according to Art. 160 (2) of the Spatial
Development Act (SDA) effective as of 31.01.2001, the functions
of designer and builder may not be combined; the Bulgarian
regulatory framework envisages issuance of Permit of Access to
the Project and of Act 15 before issuance of the Taking over
certificate. These problems were resolved with the support and co-
operation of the Assignor and the MRDPW;
There was a misunderstanding in the initial period on the part of
the Supervisor regarding his obligations with regard to the control
of the works - letter of the Supervisor regarding the clearance
procedures while complying with national requirements.


It would be difficult to apply sanctions in the course of
implementation for delays established in the stages of design and
construction. The general provisions (Clauses 4.1 and 8.2) of the
contract regulate the obligations of the Contractor for completing
the signed commitments on time, but the financial sanction
(0.05% of the contractual value for each day of delay, but not to
exceed 10% of the said value) may be applied in case of failure to
meet the deadline for completion of the project.

The legal status of the Contractor in the person of Va Tech Wabag
Kulmbach/Hydrostroitelstvo LTD is not clarified.

The funds appropriated are being spent according to purpose and
in conformity with the law according to the requirements of DIS,
FIDIC, the contractual commitments and the available supporting
documentation. No omissions or violations have been ascertained.

     4.2. BG 9906-01-01-0001 Supervision




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The main goal of the Project is to exercise control over the
expedient use of the funds, performance of construction and
successful commissioning into operation.

The VAI-VA- Project AB company concluded contract № 9906-
01-01-0001 on 28.12.2000, of a total amount of Euro
639,978.00 and a term of 34 months (from 31.01.2000 until
31.10.2003)‚ Euro 600,000 being provided by the PHARE
Programme‚ and Euro 39,978 represented co-financing from SM.

The total of payments made by 05.11.2002 amounted to
Euro 365,669.12 (57% of the amount envisaged), of which
Euro 344,106.33 under the PHARE Programme and Euro 21,562.79
in co-financing from the SM.

All payments and documents related to them have been checked
(invoices, payment orders and the related correspondence). The
required documents attached correctly reflect the expenditures
made.

The extension of the term for completion of the construction works
requires a respective extension of the term of the supervision
contract. Supplementary expenses for supervision must be covered
by additional co-financing by the Sofia Municipality. A letter of the
SM stated that the MF and the SM would find a joint solution to
the problem prior to the expiry of the agreed terms.

The VAI VA company is implementing good construction
supervision and actively contributes to the implementation of the
project.

5.CONCLUSIONS FOR THE FINANCIAL MANAGEMENT AND
IMPLEMENTATION OF PROJECT BG 9906

5.1. The Project is in its implementation stage. The goals set are
expected to be achieved in accordance with the written
commitments. Financial management and control of the funds
disbursed under the Financial Memorandum are in conformity with
the legal framework and the priorities set.




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5.2. The funds disbursed are expended according to their purposes
and in conformity with the laws following the sequence of
procedures, the obligatory rules of the PHARE Programme and the
contracts signed. No omissions or violations have been
established. By 05.11.2002 under project BG 9906 funds have
been absorbed totaling Euro 4,580,444.49, representing
25.53% of all contracted funds in the amount of
Euro 17,939,928.35. Accounting of the payments is in conformity
with the requirements of the European Commission in Brussels
and the DIS Manual.

5.3. Economy has been achieved in management of the funds
allocated. Contractors for the individual contracts were selected by
tender procedures, carried out in conformity with the DIS rules. No
overlapping of activities, overruns of project budgets, increases of
contracted funds in the course of implementation and/or
reductions of the volumes of contracted tasks, have been allowed.
The contingency funds were used in conformity with the
requirements.

5.4. As to project planning, potential risks at the different stages
of the project cycle were not taken into account and the
preliminary evaluation of the required construction works was
inflated. These circumstances created prerequisites for contracting
Euro 17,899,950.35 out of the funds, appropriated under the
Financial Memorandum in the amount of Euro 23,000,000.00, as
well as an impossibility to offer the full scope of construction works
when dividing the SWWTP project into two parts. The omissions in
the tender documentation could have been avoided or minimised if
a more stringent control and better co-ordination existed in the
process of design planning, as well as committing the consulting
company, which prepared the tender dossier to subsequent liability
in terms of completeness and conformity of the documentation
prepared.

5.5. In pursuance of the goals the following concrete results
have been achieved:

a)    Project BG 9906-01-01-0002 – Upgrading and Rehabilitation
      of the Sofia Waste Water Treatment Plant. Lack of rhythm
      and delays in implementation have been observed, to which

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     the following prerequisites have contributed: involvement of
     different institutions and units in implementation,
     management and supervision of the project; in the process
     of design planning no option was reviewed for separating the
     design part from the construction part; the existence of
     unclear issues in the tender documentation; poor
     information; failure to observe internal regulations and the
     legal status of the Contractor; difficulties in implementing
     extreme administrative measures and sanctions during
     implementation phase in cases of contracts, based on the
     design-construction-turnkey     transfer    scheme.    These
     circumstances have led to an extension of the completion
     deadline from 24.01.2003 until 15.05.2003, as well as to
     absorption of EUR 3,149,405.66 which represents 21.30%
     of the contracted funds in the amount of Euro 14,785,702.00
     (activities, related to implementation) during 71.16% of the
     term of the project, which has already expired;
b)   Project BG 9906-01-01-0001 “Supervision”. The VAI VA
     company are correctly performing all activities, regulated by
     the contract and actively co-operate for the successful
     completion of the project.

6.    The Executive Agency is applying efficiently the principles of
good administration, while actively participating in the monitoring
of project implementation and successfully controls the financial
management of funds. Accounting of funds has been in conformity
with the laws, true and regular, reports and forecasts of the
financial status of the projects were regularly prepared. The
respective advance and interim payments have been made
following detailed inspection of the supporting documents and in
conformity with the PHARE control procedures.

7.    The UIMP at the Sofia Municipality actively co-operates for
settlement of issues, successfully monitors and controls
implementation and applies considerable efforts for project
implementation.

8.    The project is still not completed and therefore at present no
assessment could be made of its effectiveness and expected
positive impact


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9.    There is no approved system of internal financial control in
conformity with the requirements or Council Regulation №
1266/99. No internal audit of the Programme has been
performed by the Agency for State Internal Financial Control.

6. RECOMMENDATIONS MADE ON THE GROUNDS OF THE
ASCERTAINED FINDINGS

We consider it expedient that the Minister of finance should
undertake the following measures:

     - to approve risk assessment system for the process of
       design planning, preliminary evaluations of the design
       works, the comprehensiveness and compliance of the
       drawn up documentation, as well as of the co-ordination
       and responsibilities of the participants in the whole cycle
       of project implementation.

     - in future projects, having limited term of implementation,
       to consider the possibility of separating the design part
       from the constriction part in the scheme - design-
       construction- turnkey transfer with a view of reducing the
       unclear design components and facilitating the
       compliance procedures, as well as linking the terms of the
       construction and supervision contracts.

     - to give orders for performing efficient control and better
       co-ordination between institutions and units, involved in
       different procedures of the tendering procedure in order
       to avoid omissions and discrepancies in the tender
       documentation;

     - to see to the implementation of the internal audit system
       in conformity with the rules of Council Regulation
       1266/99.




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