The Independent Verification Agent, the APA Process and Dealing with Potential Issues

1.1 The Independent Verification Agent Arrangements

  • The Office of the Auditor-General for the Federation has formally accepted the IVA role.
  • A third-party/external firm will be engaged to work with the IVA to conduct the Annual Performance Assessments (APAs).
  • During the APAs, the IVA and the third-party/external firm will work together in joint teams in the conduct of the APA, from the process of data collection to assessment to issuance of the individual verification reports to each participating state (copy to the PCU and WB), and the consolidated verification report(s) to the PCU and the WB.
  • The work of the third-party/external firm will be guided by the agreed Terms of Reference attached to the contract (Annex 3 holds the current ToR, subject to negotiations).
  • The IVA and the external audit firm will assess states’ achievement of the DLRs in accordance with the APA Guidelines and DLI verification protocols. It is envisaged that this would entail a combination of central desk review and physical verification through on-site visits to states. The specific activities will be determined by the IVA.
  • In the process of the APA, the IVA will receive and review reports by the DMO on the states’ performance on the Debt Management DLRs (DLI 7, 8 & 9). The IVA may request data and inputs from other government and non-government entities related to the states’ achievement of the DLRs. The IVA reserves the right to come to a conclusion different from the DMO and other entities providing inputs.
  • The IVA will formally submit to the PCU and the Bank the Consolidated Verification Report, which is to be signed by both the AuGF and the external firm to indicate that the report accurately reflects the verification of results by both parties. It does not mean that both parties agree on every result.
  • The IVA reports the results of the APAs while decision on disbursement is made by the Bank.

The APA Process and Outputs

The APA process with the roles and responsibilities of key stakeholders, information flows and sequencing are described in Figure 4 below (the timelines depict years 2 and 3 APAs).

The IVA will conduct an interim APA and a final APA in each year of assessment. At the end of each APA (interim and final), the IVA is expected to produce the following:

  1. State Annual Performance Assessment Reports to be sent to each individual state, with copies to the PCU and the World Bank. Each report will contain the following information:
  • Description on the work done by the IVA on each DLR and areas of difficulty in confirming the State’s performance
  • A binary assessment on each DLR (pass or fail)
  • For the final APA, any adjustments of the interim assessment on DLRs based on audited financial statements (instead of interim year-end figures)
  • Details of the reasons why the state failed to achieve the DLR – for example out of the multiple elements required to achieve the DLR, which of the elements were not achieved, and which ones were achieved.
  1. Consolidated Verification Reports: This will be a compendium report to the PCU and the World Bank, covering all participating states. The report will contain the following information:
  • Description on the work done by the IVA and the external firm for the APA
  • A binary assessment on each DLR (pass or fail) for each state
  • For the final Verification Report, any adjustments of the interim assessment on DLRs based on audited financial statements (instead of interim year-end figures) for each state
  • Notes on any areas of disagreement between the IVA and the external firm on the performance of each state, the views of each party, and information on how the disagreement was resolved (if resolved)
  • Lessons learnt and recommendations for the next APA and any proposed revisions to the APA Guidelines and DLI Verification Protocols.

Dealing with potential issues rising during the APA process

This section contains potential issues which may arise during the APA process and the recommended process for dealing with the issues:

  1. Delays caused by states providing verification data late:
  • The IVA will provide the states with a comprehensive information request that includes the deadlines for the submission of data required for the APA. Deadlines will vary but in general states are expected to provide information no more than 4 weeks after the information request is sent.
  • In the interest of fairness, the IVA will in general only grant extensions to the stated deadlines for all states, not individual states. Note that extensions by the IVA will only be granted in rare circumstances.
  • The IVA will reach its conclusion on whether DLRs have been achieved based on the information available at the time of the stated deadline.
  1. Disputes between IVA and the external firm:
  • The IVA or external firm (either party is allowed to notify) notifies the Bank and PCU before the completion of the Consolidated Verification Report of any areas of disagreement on the assessment of achievement of DLRs.
  • The Bank and PCU may convene both parties with a view to resolve the disagreements in time to prevent delays in disbursements.
  • In case where disagreement pertains only to a subset of states, it is possible to disburse to states where there is no disagreement while the disagreement is being resolved with a subset of states.
  • Once the disagreement is resolved, any disbursements can be made outside of the normal cycle.
  • Ultimately the Bank has the right to be able to decide to disburse even if there remain disagreements between the IVA and external firm and the report contains notes on where there is disagreement on the assessment of results.
  1. Cases of fraudulent reporting by states: The IVA will immediately report on any indications of systemic attempts at fraudulent reporting of data related to DLR achievement by participating states to the Bank and PCU.

1.2.  PforR Annual Performance-based Funding Determination

The total PforR financing disbursement due to an individual state, which the Bank has accepted as having met the EC is the sum of the values – as stated in the DLI matrix – of all the DLRs accepted by the Bank as having been achieved by the state in the performance year assessed, with the following adjustments (if applicable):

  • By the over or under-payments from the previous year due to the IVA’s assessment of the previous year using audited financial statements in the final APA (versus interim financial statements during the interim APA process).
  • In case where a state was “over-paid” in the previous year but is not due any PforR financing in the current year (for example, by failing to achieve the EC) to deduct from, the general principle should be that the state should still refund the Bank through the FGN as per the relevant provisions of the Subsidiary Grant Agreement.
  • For states which are also benefitting from other Bank-funded performance-based financing operations, the Bank shall reduce the amount payable related to DLRs for which the state have already received performance-based financing from other projects. The SFTAS Financing Agreement includes a covenant to this effect

The total PforR financing disbursement for each performance year will be the sum of the total PforR financing disbursements for all states achieving the Eligibility Criteria in the performance year being assessed, subject to the overall financing envelope of USD 700 million for the PforR component. If states collectively under-perform relative to expectations for the year, the surplus allocated funding amount will be carried over to the subsequent year. The carryover does not apply at the individual state level i.e. states do not receive the disbursements for the previous year if they did not achieve the DLR even if they achieve the DLR the next year. If states collectively over-perform relative to expectations for the year, disbursements will be made in accordance to the full financing amount due, subject to staying within the overall financing envelope of USD 700 million for the PforR component.

1.3.  PforR Disbursement Arrangements

Annual disbursements for the performance-based financing will be triggered by the Bank’s decision to disburse after receiving evidence of the states’ achievement of the Program EC and DLRs through the APA process by the IVA, including any applicable adjustments. The Bank will formally communicate the decision to disburse to the PCU and participating states.

States are only able to receive PforR/performance-based financing upon signing of the Subsidiary Grant Agreement (SGA). The SGA is a legal agreement between the federal government (the borrower) and the states (the beneficiaries). Any state without a signed SGA will have any PforR/performance-based financing due withheld until the SGA has been signed.

The flow of funds arrangement triggered by the Bank’s decision to disburse:

  • Upon receiving the decision to disburse from the World Bank, a WA will be submitted by the PCU to the World Bank, using the World Bank’s standard disbursement forms through the e-disbursement functionality in the World Bank’s Client Connection system.
  • The IDA credit proceeds will be disbursed to the federal government’s Special Fund Account which serves as a sub-account of the federal TSA held with the CBN and managed by the FMoF HFD as the PCU for the Program.
  • The PCU will make disbursements to individual states from the Special Fund Account to the Consolidated Revenue Fund accounts of the state governments strictly in accordance to the decision to disburse made by the Bank.
  • Funds should be transferred to the individual states accounts within 14 days of receipt of IDA credit proceeds for the PforR component into the Special Fund Account held with the CBN.

Figure 5: PforR Disbursements/Funds Flow Arrangements

In case where there is a delay of more than 4 weeks in reaching a decision to disburse for all participating states due to disagreements/issues on the verification of the achievement of DLRs for some states, disbursements should proceed with the subset of states where the Bank has reached a decision to disburse, in order to not delay the regular annual PforR cycle timelines. Disbursements to states where the Bank reaches a decision to disburse later can be made out of the regular annual PforR cycle. The flow of funds arrangement upon receiving the decision to disburse for these states will remain the same as described above.

The figure below shows the results chain for the Program and how the DLIs support it: