«INTERNAL AUDIT REPORT OF PANAMA OPERATIONAL HUB (PAOH) AT PANAMA CITY, PANAMA Final Audit Report No. IAIG/4002 Issue Date: 30 May 2014 INTERNAL AUDIT ...»
INTERNAL AUDIT AND INVESTIGATIONS GROUP
INTERNAL AUDIT REPORT
PANAMA OPERATIONAL HUB (PAOH)
PANAMA CITY, PANAMA
Final Audit Report
Issue Date: 30 May 2014
INTERNAL AUDIT AND INVESTIGATIONS GROUP
I. Executive summary
II. Audit report
1. Audit objectives and scope
2. Background of the Office
III. Detailed assessment
1. Strategic management and leadership
2. Project management
3. Procurement and supply chain management
Annex 1. Definitions of audit terms – ratings and priorities
Annex 2. Glossary
Audit report no. IAIG/4002: Panama Operational Hub (PAOH) 1
INTERNAL AUDIT AND INVESTIGATIONS GROUPReport on the internal audit of the Panama Operational Hub (PAOH) I. Executive summary Introduction As part of its annual work plan for 2014, the Internal Audit and Investigations Group (IAIG) conducted an audit of the Panama Operational Hub (PAOH) in Panama City, Panama. IAIG also conducted a field visit to the Guatemala Project Centre.
The audit was carried out in accordance with the International Standards for the Professional Practice of Internal Auditing. These standards require that the IAIG plans and performs the audit to obtain reasonable assurance on the adequacy and effectiveness of governance, risk management, and control processes.
Audit rating 1 In IAIG’s opinion, the overall level of internal control over PAOH activities is satisfactory. This opinion is based on limited scope audit procedures which were performed on a sample basis. During the audit, no material issues have come to IAIG’s attention which would indicate that a different rating is more appropriate.
Key audit issues and recommendations The audit report contains nine recommendations, two of which are high priority and the remaining
seven of which are medium priority. The high priority recommendations include:
Function Audit recommendation Strategic The Director, PAOH, should implement a structured approach to business management development and further diversify the portfolio of the Hub with regards to the and leadership partners involved and the services provided, as mentioned in its Regional Operational Plans.
Procurement The Director, PAOH, should ensure that the chairperson of the bid evaluation and supply committee has at least five years of procurement experience, and at least one chain member of the committee is independent of the procurement process, and that management there is appropriate segregation of duties in the procurement process.
The medium priority recommendations include actions required to: operationalize the network structure of the Hub; strengthen the engagement acceptance process; review the practices followed for managing the UNHCR portfolio; strengthen the bank guarantees management system; ensure compliance with Finance Practice Group instructions concerning issuance of Purchase Orders as soon as the contract is signed and funds are received from the client, so that commitments are recognized in ATLAS; improve the monitoring system for procurement activities, for both the pre-award stage and post-award stage for contract management; and ensure that procurements are carried out as per the terms and conditions of the contract.
1 See definitions in Annex 1
II. Audit report Audit objectives and scope The audit objectives were to determine whether the governance, risk management, and control
processes over the Office’s operations provide reasonable assurance to the Executive Director that:
a) Significant objectives will be achieved in all projects, programmes, plans and businesses;
b) Resources are used economically and efficiently;
c) Financial, managerial and operating information is accurate, reliable, relevant and timely;
d) Activities and transactions comply with policies and procedures and the relevant agreements and contracts; and
e) Assets are safeguarded.
The audit was completed as per the approved planning memorandum and taking into account the findings of the risk assessment exercise carried out prior to the audit. IAIG reviewed the effectiveness of key controls over operational processes and management practices, with particular focus on the functional areas relating to (i) project management, and (ii) procurement and supply chain.
Identified opportunities for improving management control over other functional areas are also reported as deemed appropriate.
The audit covered the activities of the office from 1 January 2013 to 31 December 2013.
Background of the Office The Panama Operational Hub (PAOH) was established on 15 March 2013 based on Organizational Directive (OD) 15, addendum 2. It forms part of the new regional set-up and it was incorporated in the framework of the UNOPS Regional Division for Latin America and the Caribbean Strategic Plan 2012Above all, it follows the recommendation of the latest UNOPS corporate process for changes in global structure initiated in October 2012, which emphasizes the need to leverage and optimize its presence across the world. After consultations during the 2012 Global Management Meeting and Strategic Management Meeting, a must-win was identified covering the need to set up and define the structure and functions of an Operational Hub (OH).
The purpose of the PAOH is to manage strategic and operational risks associated with a subset of the regional portfolio of engagements, and to develop and deliver cost-effective services, contributing to partners’ sustainable results and the achievement of UNOPS management results.
PAOH is supported by Project Centres (PCs) in Panama, Guatemala, Nicaragua, El Salvador, Dominican Republic, Costa Rica, Mexico and Honduras. The current model for PAOH aims to leverage present capacities across the countries in the region to ensure cost-effective operations.
IAIG wishes to extend its appreciation to the management and personnel involved in the audit at PAOH, as well as practice personnel at Headquarters, for their full cooperation during the audit.
The detailed audit observations and recommendations are provided in Part III of the report.
III. Detailed assessment
1. Strategic management and leadership Observation 1 Operationalizing the new structure of the Panama Operational Hub As per OD 15, addendum 2, dated 15 March 2013, the Panama Operational Hub was set up with responsibility over the offices in Panama, Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras, Mexico and the Dominican Republic. In August 2013, the Executive Office approved a proposal from the Latin American and the Caribbean Regional Office (LCO) to carry out a ‘Reshaping’ exercise of the entire region, including the set up of the Operational Hub based in Panama and its functional separation from the Regional Office. One of the core functions of the Operational Hub is to ‘maintain appropriate arrangements and capacity for direct transactional support for delivery of the [Hub’s] portfolio’.
PAOH is currently operating as a network of offices, with support integrated from practice leads from the regional office and the project centres of the Hub. The PC heads based in the project centres report to the PAOH Director, who also functions as the Deputy Regional Director for the Region. A broad terms of reference has been developed for the Hub, but the organizational structure within the Panama office could be further developed and clarified by defining the reporting lines, oversight mechanisms, work plans, etc. of the support functions.
Management informed that a new structure for the LCO region has been proposed and approved in the targets for 2014, and PAOH is currently in the process of implementing the new network structure.
Recommendation: IAIG/4002/01 Priority: Medium
In order to operationalize the new structure of the Operational Hub in a structured and systematic manner, as required in OD 15, the Director, PAOH, should clearly define the reporting lines, oversight mechanisms, work plans, etc. of the support functions. He should also enhance the proactive role of PAOH in providing support, advice and capacity building to the other offices in the Hub.
Management will prioritize the operationalization of the Hub based on the current reshaping under way.
Observation 2 Business development FRR Regulation 4.01 underscores the management of risks, and the selection and maintenance of various solutions to mitigate risks. OD 33 further provides a framework for risk management at the strategic level. As required by Financial Regulation 9.01, ‘As a self-financing entity UNOPS shall operate on the basis of full cost recovery and shall set its management fees accordingly. Resulting from its ordinary activities during each financial period, UNOPS shall generate sufficient net surplus to maintain operational reserves at the level established by the Executive Board’. Consequently, UNOPS must on an annual basis generate sufficient revenue to cover all its costs, and make contributions towards operational reserves at the level established by the Executive Board. Therefore, each regional business unit (Operational Hub, Operations Centre, Project Centre or Cluster) needs to develop and deliver enough business to ensure it is financially viable and self-sustaining, and to contribute to the overall financial sustainability of UNOPS.
As per the Regional Operational Plan for 2013, as well as for 2014, one of the objectives was to promote business diversification by type of service and type of partner.
IAIG reviewed the status of diversification of the business portfolio of PAOH in 2013. Data from the management workspace shows that, by percentage of gross revenue, the top donors and partners for
The above table shows that the business portfolio in PAOH is heavily concentrated amongst a few 2 donors who make up 80-90 percent of the gross revenue for each office. Data from the Leads system for projects in pre-engagement phase show very few projects with other clients or locations.
Overreliance on a few clients is a risk for business continuity. There is thus a need to strengthen business development and to further diversify the portfolio with regards to the partners involved, the services provided and the locations.
In the case of the Guatemala Project Centre (GTPC), new business acquisition during 2013 was only USD 500,000. Leads data as on 13 February 2014 showed that there was only one new lead for USD 600,000, which is also in the lead generation stage. Project 53788, which is a very large project accounting for 85 percent of office delivery, is due to close in November 2014. With limited business acquisition, GTPC needs to develop a strategy for business development.
Management agrees that there is a need to diversify, but mentioned that more partners from the same government also represent a diversification. However, data on leads in the lead generation and preengagement stage in the leads system shows limited business opportunities and lack of diversification in the Hub. Further, the implementation results of the Regional Operational Plan for 2013 shows limited diversification of the Hub portfolio, except for one project with UNEP.
The Director, PAOH, should implement a structured approach to business development and further diversify the portfolio of the Hub with regards to the partners involved and the services provided, as mentioned in its Regional Operational Plans.
It is important to explain that the LCO business model is constituted of Governments’ portfolio, being donors and recipients at the same time. This has been the traditional model in LCO and will be more and more in the future. It is not correct to state that the ‘business portfolio in PAOH is heavily concentrated on a few donors’, as Government itself can contain different levels of counterparts and have separate donors such as Ministries at central level, Municipalities, autonomous entities, etc. If such a differentiation is not made, then no critical analysis can be done. Likewise, the definition “UNDP” also does not work well; in most cases at regional level, UNDP is an “old” partner and there is no real involvement of UNDP in the projects (there are several exceptions to this, e.g. the 2 Online engagement approval system and engagement pipeline tool.
UNDP/UNOPS project in El Salvador with the Ministry of Public Works).
It is also worth mentioning that for some countries, such as Nicaragua and Panama, a high percentage of business development is concentrated in a few donors. Aware of such a situation, PAOH direction, together with head of Monitoring Units, is trying to diversify the portfolio through different ways of engaging with different donors as well as with separate services with the same donor. Proof of this is the number of leads contained for Nicaragua. Finally, noting the recommendation of the audit team to streamline business development initiatives, it is important to mention that business development activities are developed at different level of PAOH, through Project Managers, Head of Monitoring Unit and ultimately by the PAOH Director. Having said that, we agree on the principle of diversification as indicated by the audit, but it should be recognized that more partners from the same government also represent a diversification.
IAIG appreciates the management viewpoint and reiterates the need to diversify the portfolio, as indicated in the Regional Operational Plan for 2013 and 2014, by putting in place a comprehensive and structured approach to business development in PAOH to achieve the outcomes envisaged in the Plans. This should take into account the potential business opportunities from existing and new partners, as well as from various sections of government.