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Controller’s & Financial Services Division Guidance Note 1 RETROACTIVE FINANCING1 1. Definition: In accordance with Section 4.08 of the General Conditions (GC), Project expenditures shall be eligible for financing if they are incurred during the Implementation Period. On an exceptional basis and with the approval of the Executive Board, project expenditures may be incurred before entry into force. This type of financing is known as retroactive financing. Relevant provisions are set forth in Section 6.5 of the Financing Administration Manual (FAM) and applicable to all loans and DSF grants. 2. Legal documentation: Provisions for retroactive financing are included in Section E of the Financing Agreement (FA) as an exception to the GC. To be eligible for retroactive financing, expenditures must meet all the criteria for eligibility set out in GC Section 4.08. In accordance with Section 4.08 (a)(i) such expenditures shall meet the criteria of reasonable cost of goods, works and services required for the project and shall be procured in conformity with the Fund’s Procurement Guidelines. 3. Maximum amount: Maximum amount that may be withdrawn for retroactive financing may be a specific amount for each category or a global amount for two or more categories, preferably expressed in the loan currency. This amount should normally not exceed 10% of the financing. If exceptional cases arise, they should be reviewed on a case by case basis and approved by the CFS Director and appropriate justification disclosed in the documents. The category allocation table of the FA should specify the limits (e.g. amounts, applicable categories) applicable to such retroactive financing. Allocation of funds by category and currency fluctuation risks should be taken into account when establishing amounts and breakdown by category. Amounts should be expressed in USD or SDR in order to minimize currency fluctuation risks. 4. Disclosure and Approval: Retroactive financing represents an exception to the GCs and is normally limited to a specific amount. The proposed amount of retroactive financing, the eligible date for retroactive financing, the justification and the applicable expenditure category shall be specified in the Design Document and reflected in the President’s Report and Recommendation approved by the Executive Board under the chapter “Exceptions”. It should not normally precede the project design date, as represented by the date the project design is approved by QA. 5. 1 Disbursement: Upon entry into force and fulfillment of disbursement conditions, eligible expenditures are reimbursed into the nominated Borrower bank account in accordance with the provisions of Section E to the FA, after fulfillment of disbursement conditions. Retroactive expenditures are pre-financed by the prospective Borrower at its own risk. If the Financing Administration Manual (FAM) : Chapter 6.5 1 December 2012 financing is not approved by the EB, or does not enter into force, expenditures will not be reimbursed. The Loan Disbursement Handbook provides that such expenditures should be claimed in a separate Application so as to simplify monitoring thereof by the Finance Officer (as regards limits specified in the FA). Upon receipt of the Withdrawal Application which includes expenditures related to retroactive financing, the Finance Assistant will check eligibility of expenditures incurred prior to entry into force and record details of retroactive financing in the reference field of the payment order (PO) 6. Accountability: Retroactive financing must be included in the first financial statements of the project and audited, with appropriate separate disclosure of the amount in the Notes to the Accounts. 7. Expenditures that are Eligible: As specified in the FAM, expenditures will only be eligible for retroactive financing and thus reimbursed to the Borrower/Recipient after entry into force of the FA and satisfactory compliance with any conditions precedent to disbursement. The date after which expenditures become eligible for retroactive financing should not be earlier than the project design date. Since the legal documents specify that expenditures after this date are eligible, it is preferable to choose the last day of a month as the ‘deadline’ date, particularly in cases where claims will be submitted on the basis of SOEs To be eligible for retroactive financing, expenditures need to be specifically identified as retroactive financing in the project Work Plan and Budget for goods, works and services. This will include the related Procurement plan that will provide a detailed description of planned activities, related methods of procurement, quantities, estimated costs and the expected dates of finalization of Procurement activities. Both the specific WPB and Procurement Plan is subject to prior review by IFAD CPM. The expenditures must, of course, fall within the project description and within one or more of the eligible categories. Expenditures should be related to investment costs or studies (eg. baseline surveys). In principle, financing of vehicles, office equipment and recurrent costs should be discouraged and would be subject to the clearance of the CFS Director. 8. Grants: Retroactive financing for country grants should be discouraged, but if exceptional cases arise they should be reviewed case by case and approved by the CFS Director. Retroactive financing do not normally apply for supplementary fund grants, global or regional grants, unless donor contribution agreements specifically allow this. **************** 2 December 2012