Circular No. 57/2002/TT-BTC guides the financial management mechanism for poverty reduction projects in northern mountainous provinces.

CIRCULAR

Guidelines for the Financial Management Mechanism for the Poverty Reduction Project in Northern Mountainous Provinces

___________________________

Pursuant to:

Loan Agreement No. 3572 between the Socialist Republic of Vietnam and the International Development Association (IDA) for the project "Poverty Reduction in Northern Mountainous Provinces," signed on November 6, 2001;

The UK Department for International Development (DFID) Grant Agreement No. TF 050050 dated December 27, 2001, signed between the Government of the Socialist Republic of Vietnam and the UK Department for International Development;

Decree No. 178/CP dated October 28, 1994 of the Government stipulating the tasks, authorities, and organizational structure of the Ministry of Finance;

Decree No. 17/2001/NĐ-CP dated May 4, 2001 of the Government regulating the issuance of the Rules on Management and Utilization of Official Development Assistance;

Decree No. 52/1999/NĐ-CP dated July 8, 1999 of the Government regarding the issuance of the Rules on Investment and Construction Management; Decree No. 12/2001/NĐ-CP dated May 5, 2000 supplementing certain points of Decree No. 52/1999/NĐ-CP;

Decision No. 612/TTg dated May 21, 2001 of the Prime Minister approving the Feasibility Study Report of the Project "Poverty Reduction in Northern Mountainous Provinces";

Circular Joint No. 666/2001/TTLT/BKH-UBDTMN-TC-XD dated August 23, 2001 of the Ministry of Planning and Investment, the State Committee for Ethnic Minorities and Mountainous Areas, the Ministry of Finance, and the Ministry of Construction guiding investment management and construction of infrastructure projects under Program 135;

After reaching consensus with the Ministry of Planning and Investment, the Ministry of Finance provides guidelines for the financial management mechanism for the Poverty Reduction Project in Northern Mountainous Provinces as follows:

I.GENERAL PROVISIONS:

1. Explanation of Terms: The concepts and terms used in this circular have the same meanings as those in the Loan Agreement and are understood as follows:

* The International Financial Institutions supporting the Project are the International Development Association (referred to as IDA) and the United Kingdom's Department for International Development (referred to as DFID).

* The Project is the Poverty Reduction Project in Northern Mountainous Provinces, which borrows funds from IDA and receives non-reimbursable grant funding from DFID, approved by the Prime Minister in Decision No. 612/QĐ-TTg dated May 21, 2001.

* The General Project Management Agency is the Ministry of Planning and Investment.

* The Implementing Investment Agencies are the People's Committees of Hoa Binh, Son La, Lao Cai, Yen Bai, Phu Tho, and Bac Giang provinces (hereinafter referred to as implementing provinces).

* The Central Project Management Board (referred to as the Central PMB) is an entity established by the Ministry of Planning and Investment according to its decision, with powers and responsibilities defined in the establishment decision.

* The Provincial Project Management Board (referred to as the Provincial PMB) is an entity established by the People's Committees of the implementing provinces according to their decisions, with responsibilities and authorities defined in the establishment decisions.

* The District Project Management Board and the Village Development Board are entities established by the People's Committees of the implementing provinces based on guidance from the Ministry of Planning and Investment and the People's Committees of the Project, with powers and responsibilities defined in the establishment decisions.

* The Project Service Bank (referred to as the Project Service Bank) is the Agricultural and Rural Development Bank (ABRD) according to Decision No. 179/QĐ-NHNN dated March 12, 2002 of the State Bank of Vietnam.

2. Management principles:

- The Project is funded by the following sources: IDA loan funds, non-reimbursable grant funds from the UK's Department for International Development (DFID), and domestic counterpart funds.

- The IDA loan funds and DFID grant funds for the Project are part of the foreign borrowing and aid receipts of the Vietnamese Government, thus all borrowed and granted funds must be fully recorded in the State Budget. The Ministry of Finance manages and monitors the implementation of the loan and repayment to IDA according to the terms stipulated in the Loan Agreement and in accordance with current Vietnamese regulations.

- The Poverty Reduction Project in Northern Mountainous Provinces has a special nature as it invests in particularly difficult areas (Zone 3) to build infrastructure, mainly small scattered works, and to enhance management capacity. It is managed under the current regime for basic investment and construction management and state policies on poverty reduction. The use of IDA and DFID grant funds for the Project is carried out through state allocation from the budget as stipulated in Decision No. 612/QĐ-TTg dated May 21, 2001 of the Prime Minister.

- Budget accounting method: quarterly, the Ministry of Finance processes the recording of state budget revenue from the IDA loan for the Poverty Reduction Project in Northern Mountainous Provinces and records central budget expenditure to supplement the local budgets of the provinces to implement the project and record expenditure for the Ministry of Planning and Investment to implement the project at the central level.

- The Ministry of Planning and Investment and the People's Committees of the implementing provinces are responsible for directing the use of funds for the intended purposes and contents of the approved project, consistent with the conditions committed in the Agreement and current Vietnamese regulations.

- The Central PMB is responsible for managing the withdrawal of external funds (IDA funds and DFID grants) and paying expenses for the activities of the Central PMB in implementing the project portion.

- The Provincial PMBs are responsible for managing the withdrawal of external funds (IDA funds) for provincial project activities. The Provincial PMBs and District PMBs are responsible for managing and paying expenses for project activities in their respective provinces and districts according to the plan and division of labor in the project, providing complete and timely documentation and vouchers related to project expenditures within their province and district to the Central PMB.

- The domestic counterpart funds for project activities in the six provinces are allocated from the local budgets by the People's Committees of the provinces or raised from other legitimate sources. The central counterpart funds are compiled annually by the Ministry of Planning and Investment.

- The Treasury (Central, Provincial, and District levels) where project funds are disbursed is responsible for financial management, inspection, verification of the entire volume of work completed, and direct disbursement of counterpart funds to the Project.

- The bank serving the project shall carry out procedures to withdraw funds from IDA and DFID and make payments upon request of the Central Project Management Board and provincial boards when approved by the Ministry of Finance. During implementation, the serving bank shall be entitled to service fees according to fee schedules consistent with the State Bank of Vietnam's regulations on collecting service fees for bank payment transactions. These service fees shall be included in the total investment cost of the project.

- The Development Social Fund component of the project will be organized and implemented starting from the second year of the project and applied to communes that meet the selection criteria for capacity, which will be agreed upon by the Ministry of Planning and Investment, the Ministry of Finance, and the People's Committees of the provinces implementing the project. Financial management for the Development Social Fund component will be regulated in a separate document.

II. SPECIFIC PROVISIONS

1. Preparation of the project investment capital plan

The Central Project Management Board and the Provincial Project Management Boards are responsible for preparing and submitting for approval the project investment capital plan from IDA and DFID funds and domestic counterpart funds in accordance with current regulations.

- Annually, based on the regulations for budget preparation, submission, and examination, the Provincial Project Management Board prepares the investment capital plan for the project from IDA funds and domestic counterpart funds (including expenditures for the Provincial Project Management Board, district Project Management Boards, and commune development boards) and submits it to the Provincial People's Committee and aggregates it into the annual provincial budget. This plan is also sent to the Ministry of Planning and Investment (Central Project Management Board) for inclusion in the overall project plan.

- The Central Project Management Board prepares the investment capital plan from IDA, DFID funds, and the domestic counterpart funds managed by the Central Project Management Board for the planning year and submits it to the Ministry of Planning and Investment for consolidation into the Ministry's investment capital plan. Simultaneously, the Central Project Management Board is responsible for consolidating the overall project plan and submitting it to the Government for approval.

- Based on the investment capital plan assigned by the Government, the Ministry of Planning and Investment allocates the detailed investment capital plan for the Central Project Management Board according to sources of funding: IDA loans, DFID funds, and domestic counterparts, and sends the allocation plan to the Ministry of Finance (Department of Foreign Finance, Department of Investment, Central Treasury). On the basis of the finance ministry's notification of the capital plan (Department of Investment), the Central Treasury implements expenditure control and payment for the project. The People's Committees of the six provinces implementing the project allocate the detailed investment capital plan for the six Provincial Project Management Boards, district Project Management Boards, and commune development boards according to sources of funding: IDA loans and domestic counterparts, and send the allocation plan to the provincial and district treasuries for implementation of payment control for the project.

2. Opening accounts:

(a). The Central Project Management Board and the six Provincial Project Management Boards shall open the following accounts:

- The Central Project Management Board opens: (1) a special foreign currency account at the serving bank system to receive funds from IDA loan sources; (2) a special foreign currency account at the serving bank to receive non-reimbursable aid from the UK Department for International Development (DFID); (3) a counterpart fund disbursement account in Vietnamese Dong at the Central Treasury to disburse funds for activities specified in the approved project.

- Each Provincial Project Management Board opens: (1) a special foreign currency account at the provincial serving bank to receive funds from IDA loan sources (hereinafter referred to as the first-level special account for expenditures related to project activities under provincial responsibility; (2) a counterpart fund disbursement account in Vietnamese Dong at the provincial treasury from local government budget counterpart funds allocated for the project.

(b). The District Project Management Boards shall open the following accounts:

- A special district account (second-level special account) in Vietnamese Dong at the district serving bank to receive funds from the provincial special account.

- A counterpart fund disbursement account in Vietnamese Dong at the district treasury to receive counterpart funds disbursed for the project.

(c). The Commune Development Boards shall open the following account:

- A counterpart fund disbursement account in Vietnamese Dong at the district treasury to receive counterpart funds disbursed for the activities of the Commune Development Board.

3. Unit prices and rates

- Unit prices and rates for expenditures funded by DFID are agreed between the donor side and the Ministry of Planning and Investment and comply with Circular 70/2001/TT-BTC dated August 24, 2001, guiding financial management regulations for non-reimbursable aid.8/2001 regarding financial management regulations for non-reimbursable aid10. Various types of ceramic tiles including wall tiles.

- Unit prices and rates for expenditures funded by IDA loans and domestic counterparts for the project are implemented according to the Minister of Finance's Decision No. 112/2001/QĐ-BTC dated November 9, 2001, concerning the issuance of certain expenditure rates applicable to projects using Official Development Assistance (ODA) loan funds, and the current procurement and construction unit prices of each province.

- Operating costs for the Commune Development Boards are carried out using the domestic counterpart funds of the provincial projects according to the expenditure rates stipulated by the Provincial People's Committee after reaching consensus with the Central Project Management Board.

4. Exchange Rates

The exchange rate for payment and accounting for expenditures from the first-level special account shall apply the buying rate of the serving bank at the time of payment.

For the second-level special account, the Provincial Project Management Board uses the buying rate of the serving bank at the time of transferring funds into the second-level special account for the district, and this rate will be used when supplementing funds into the special account for the advance payment amount.

5. Withdrawal of Funds and Disbursement of Project Capital

(a). Disbursement of Counterpart Funds:

- The Central Treasury disburses the counterpart funds to the Central Project Management Board, the provincial treasuries disburse the counterpart funds to the Provincial Project Management Boards, and the district treasuries disburse the counterpart funds to the District Project Management Boards and Commune Development Boards according to the annual plan assigned and in accordance with current regulations on state budget capital management.

- The counterpart funds will be disbursed in accordance with the agreed contribution ratio for each project work item according to the Loan Agreement and project documents.

Specific procedures and formalities for payment shall be carried out in accordance with current domestic regulations.

(b). The management of DFID aid funds for project activities carried out by the Central Project Management Board shall be in accordance with the Aid Agreement number TF 050050 signed on December 27, 2000.1. The management process of DFID aid funds shall be implemented in accordance with the provisions of Circular 70/2001/TT-BTC dated August 24, 2001 guiding the financial management regime of state funds for non-repayable aid.n001/TT/BTC dated August 242001 guiding the financial management regime of state funds for non-repayable aid.7 ||| The withdrawal of funds from non-repayable aid DFID sources shall be carried out strictly in accordance with the procedures and formalities prescribed in Joint Circular No. 81/1998/TTLT-BTC-NHNN dated June 17, 1998 of the Ministry of Finance and the State Bank of Vietnam, and Decision No. 96/2000/QD-BTC dated June 12, 2000 of the Minister of Finance.i. The withdrawal of capital from non-repayable aid funds D shall be carried out in accordance with the prescribed procedures and formalities for withdrawalFID shall be implemented according to the correct withdrawal process and procedures12, 2000 of the Minister of Finance.u.

(c). Withdrawal and disbursement of IDA loan funds

- The withdrawal of IDA loan funds to pay for project activities according to Direct Payment and Letter of Commitment forms shall be carried out strictly in accordance with the procedures and formalities prescribed in Joint Circular No. 81/1998/TTLT-BTC-NHNN dated June 17, 1998 of the Ministry of Finance and the State Bank of Vietnam, and Decision No. 96/2000/QD-BTC dated June 12, 2000 of the Minister of Finance. Other withdrawal methods are specified as follows:

(i) Withdrawal to the special account of the Central Project Management Board

- Initial withdrawal to the special account of the Central Project Management Board:

Based on the account limit stipulated in the loan agreement and the Aid Agreement, and the projected expenditure in the near future, the Central Project Management Board shall submit to the Ministry of Finance (Department of Foreign Financial Affairs):

* A letter requesting withdrawal, and a withdrawal form.

Within five working days from the date of receipt of complete and valid documents, the Ministry of Finance (Department of Foreign Financial Affairs) shall issue a written opinion sent to the Central Project Management Board and the servicing bank. Within two working days from the issuance of the Ministry of Finance's opinion, the servicing bank and the Central Project Management Board shall sign the withdrawal form sent to the IDA sponsor.

- Additional withdrawal to the special account of the Central Project Management Board

The Central Project Management Board shall submit one set of documents to the Ministry of Finance (Department of Foreign Financial Affairs). The documents include:

* A letter requesting additional withdrawal to the special account of the Central Project Management Board.

* An expenditure statement prepared by the Central Project Management Board clearly showing expenditures from the central special account and a copy of the payment voucher for completed work volume or payment schedule and advance request form confirmed by the Central Treasury.

* A reconciliation report of the special account prepared by the Central Project Management Board (Account Reconciliation Statement).

* A statement of the special account of the State Bank and Agriculture Development Bank of Vietnam.

Within five working days, the Ministry of Finance (Department of Foreign Financial Affairs) shall issue an opinion sent to the Central Project Management Board and the servicing bank. Within two working days from the issuance of the Ministry of Finance's opinion, the servicing bank and the Central Project Management Board shall sign the withdrawal form sent to IDA. IDA will consider and approve the additional transfer to the special account (See Diagram 1).

(ii) Withdrawal to the special account of the Provincial Project Management Board.

- Initial withdrawal to the special account of the Provincial Project Management Board:

Based on the account limit stipulated in the loan agreement, and the projected expenditure in the near future, the Provincial Project Management Board shall submit to the Central Project Management Board, the Ministry of Finance (Department of Foreign Financial Affairs):

* A letter requesting withdrawal, and a withdrawal form.

Within five working days from the date of receipt of complete and valid documents, the Ministry of Finance (Department of Foreign Financial Affairs) shall issue a written opinion sent to the Provincial Project Management Board, the Central Project Management Board, and the servicing bank. Within two working days from the issuance of the Ministry of Finance's opinion, the servicing bank and the Provincial Project Management Board shall sign the withdrawal form sent to the IDA sponsor.

- Additional withdrawal to the special account of the Provincial Project Management Board (IDA funds):

The Provincial Project Management Board shall submit one set of documents to the Ministry of Finance (Department of Foreign Financial Affairs) and one set to the Central Project Management Board. The documents include:

* A letter requesting additional withdrawal to the special account sent to the Ministry of Finance and the Central Project Management Board.

* An expenditure statement prepared by the Provincial Project Management Board clearly showing expenditures from the provincial special account and a copy of the payment voucher for completed work volume or payment schedule and advance request form confirmed by the Provincial Treasury.

* A statement of the first-level special account of the servicing bank at the province.

* A reconciliation report of the special account prepared by the Provincial Project Management Board (Account Reconciliation Statement).

* A statement of the second-level special account of the servicing bank.

* An expenditure statement prepared by the District Project Management Board clearly showing expenditures from the second-level special account and a copy of the payment voucher for completed work volume or payment schedule or advance request form confirmed by the District Treasury.

The amount transferred to the second-level special account will be supplemented with IDA funds based on actual expenditures from this second-level special account.

Within two working days from the date of receipt of complete and valid documents, the Central Project Management Board shall issue a confirmation sent to the Ministry of Finance (Department of Foreign Financial Affairs). Within five working days, the Ministry of Finance, after receiving the confirmation of the Central Project Management Board, shall issue an opinion approving the withdrawal sent to the Provincial Project Management Board, the Central Project Management Board, and the servicing bank. Within two working days from the issuance of the Ministry of Finance's opinion, the servicing bank and the Provincial Project Management Board shall sign the withdrawal form sent to IDA. IDA will consider and approve the additional transfer to the special account (See Diagram 2).

(iii) Payment from the first-level special account upon request of the Central Project Management Board and provincial project management boards.

The payment from the special account will be carried out as follows:

For pre-audit, the Central Project Management Board and provincial project management boards shall submit documentation and vouchers in accordance with current regulations to the Central Treasury and the corresponding provincial treasury. Within five working days, the Central Treasury and the provincial treasury shall audit and confirm the value of completed work volume sufficient for payment and pay the counterpart funds to the contractor. Based on the approval of the Central Treasury and the provincial treasury, the Central Project Management Board and provincial boards shall proceed with the servicing bank to make payments from the special account to the contractor or beneficiary. (See Diagrams 3 and 4)

For post-execution control conducted as follows: Within five days after payments from the Special Account are made, the Central Project Management Board and provincial Project Management Boards must submit payment documentation to the State Treasury Central Office and the Provincial State Treasury for post-payment verification procedures.

Each payment from the Special Account must comply strictly with the foreign/local capital ratio specified in Appendix 1 of the Credit Agreement.

The application for payment from the Special Account includes:

* Decision approving the tender results issued by the competent authority.

* Economic contracts signed with suppliers and contractors and the decision approving such contracts.

* Approved budget estimates for regular expenditures of the Central Project Management Board or provincial Project Management Boards by the competent authority.

* Performance bond (in case of advance payment under the contract).

* Acceptance, handover, and liquidation certificates of the contract (if final payment).

* Valid financial invoices for purchases of goods.

* Other necessary documents and certificates according to current domestic regulations on payment for basic construction investment activities.

(iv) Payment from the second-level Special Account at the request of the County Project Management Board (see Diagram 5):

The Provincial Project Management Board will transfer from the first-level Special Account the IDA funds from the Bank to the second-level Special Account of the County Project Management Board opened at the Bank serving the county, equivalent to 30% of the value of the construction contract. For other contracts (goods, consultancy...), the transfer of funds shall be carried out in accordance with the provisions of the contract.

- Payment from the second-level Special Account

The form of pre-control over expenditures proposed by the County Project Management Board involves sending relevant documents and certificates to the County State Treasury, including:

* Contracts that have become effective according to current regulations.

* Summary statements of advance payment requests/settlement of completed work volumes of projects and sub-projects at the county and commune levels.

* Other necessary documents and certificates according to current domestic regulations on payment for basic construction investment activities.

Within five working days from receiving a complete set of documents, the County State Treasury will check the documents and confirm the value of completed work/volume sufficient for payment on the Payment Price Certificate or Settlement Statement, simultaneously making the corresponding domestic counterpart payment. The confirmation of the County State Treasury must clearly state the total amount paid, detailed according to loan funds and domestic counterpart funds. The Payment Price Certificate confirmed by the County State Treasury serves as the basis for the Agricultural and Rural Development Bank branch at the county level to disburse IDA funds from the County Project Management Board's Special Account to make payments as requested by the County Project Management Board.

(v) Supplementing the second-level Special Accounts with IDA funds

When construction contracts reach 50% of the contract value and initial advances have been made, the County Project Management Board will prepare a supplementary application for the second-level Special Account to be sent to the Provincial Project Management Board.

In cases of refusal, the State Bank will issue a document refusing approval to use foreign currency within the territory and clearly state the reasons.

* A letter to the Provincial Project Management Board requesting an additional advance of the second-level Special Account for the county equal to 35% of the value of the signed contracts.

* A copy of the Payment Price Certificate for completed work volume or settlement statement or advance request form confirmed by the County State Treasury reaching 50% of the signed contract value.

* Summary statements of expenditures from the second-level Special Account of the county.

* Completion acceptance records of project components and works with signatures of all relevant parties.

* Summary statements of the second-level Special Account of the Bank serving the county.

Within five working days from receiving a complete set of documents, the Provincial Project Management Board will review and process the transfer of funds from the Provincial Project Management Board's Special Account to supplement the County Project Management Board's second-level Special Account, equal to 35% of the contract value and according to the payment request.

The next supplementation of the County Project Management Board's second-level Special Account will be based on the completion acceptance record of 100% of project components according to the contract. The County Project Management Board will prepare a supplementary capital application for the second-level Special Account, including the above documents, requesting an additional advance of 35% of the contract value.

Interest on the first and second-level Special Accounts must be separated monthly and transferred to the state budget after deducting bank fees according to current regulations.

7. Reporting, inspection, auditing, settlement

a. Reporting System

- Monthly, the serving bank is responsible for submitting account summary reports of the first-level Special Account to the Ministry of Finance (Department of State Budget and State Treasury), the Central Project Management Board, and the Provincial Project Management Board as the basis for recording income and expenditure in the state budget.

- Quarterly, annually, and upon completion of the project, the Central Project Management Board is responsible for compiling the project expenditure situation, reporting to the Ministry of Planning and Investment and the Ministry of Finance (Investment Department, Central State Treasury, Foreign Financial Department) on the implementation of the project, detailing the withdrawal and use of IDA funds and domestic counterpart funds quarterly and annually, and submitting the annual accounting report of the project.

- Quarterly and annually, the Provincial Project Management Board prepares quarterly and annual reports on the implementation of sub-projects, the use of IDA funds and domestic counterparts, and submits the annual accounting report and final settlement report upon completion of the project to the People's Committee of the province, the Ministry of Finance, the Ministry of Planning and Investment, and the Central Project Management Board.

b. Accounting and asset management

- Project Management Boards are responsible for fully and promptly reflecting expenditure accounts on documents and accounting books in accordance with the State Budget Law; the Accounting and Statistics Ordinance; and the current accounting system of the state and donors.

- Asset and equipment management must comply with current state regulations. After the completion of the project, assets must be handed over in accordance with the Government Decree No. 14/1998/NĐ-CP dated March 6, 1998 on State Asset Management and Circular No. 42/TC-QLCS dated July 31, 1996 of the Ministry of Finance guiding the receipt and handover of assets between administrative and economic organizations as stipulated by the competent authority.

c. Audit

- Annually, the Special Accounts, accounts of the Central Project Management Board (CPMB) and Provincial Project Management Boards (PPMBs), books of accounts, vouchers, and accounting files of the Project must be audited by an independent auditing company in accordance with Vietnamese regulations and the International Development Association (IDA).

- The selection of the auditing company shall be conducted through a bidding process for consulting services in accordance with current regulations. The results of the selection must be approved by the Ministry of Finance and IDA.

- The Central CPMB shall enter into a contract with the winning independent auditing company to conduct the audit for the entire Project.

- The audit report must be submitted to the Ministry of Finance (Department of Foreign Financial Affairs, Department of Investment, State Treasury), the Ministry of Planning and Investment, the State Bank of Vietnam (International Relations Department), and the World Bank.

d. Inspection

- Periodically and unexpectedly, the Ministry of Finance and the Ministry of Planning and Investment will inspect the implementation of the project and the use of funds. If cases of improper use of funds are discovered, the Ministry of Finance will suspend fund transfers and handle violations according to current regulations.

e. Settlement

Annual investment capital execution reports and final investment settlement reports of the Project shall be carried out in accordance with Circular No. 70/2000/TT-BTC dated July 17, 2000, issued by the Ministry of Finance guiding the settlement of investment capital, and Circular No. 70/2001/TT-BTC dated August 24, 2001, guiding the financial management system for state-owned assets from non-repayable aid sources.

Provincial PPMBs shall prepare annual investment capital execution reports and final project settlement reports for the parts of the project implemented by the province. The Central CPMB is responsible for compiling annual investment capital execution reports and final investment settlement reports when the project concludes.

III. IMPLEMENTATION PROVISIONS

This Circular takes effect fifteen days from the date of signature. During its implementation, if there are any difficulties, relevant agencies must promptly reflect them to the Ministry of Finance for study and amendment.