State Agency of Azerbaijan Automobile Roads THIRD HIGHWAY PROJECT Loan No. 7889- International Bank for Reconstruction and Development Loan No. 8602- International Bank for Reconstruction and Development Loan No. 4723- International Development Association INDEPENDENT AUDITORS' REPORT AND SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS For the years ended 31 December 2020 and 30 April 2021 CONTENTS Page Independent Auditors' Report 3-4 Special Purpose Project Statement of Financial Position 5 Special Purpose Project Statement of Sources and Uses of Funds 6-7 Special Purpose Project Statement of Project Activities 8 Special Purpose Project Statement of Special and Project Accounts 9 Notes to the Special Purpose Project Financial Statements 10-17 S MOORE Moore Azerbaijan 102A, Jalil Mammadguluzada Street Baku,Azerbaijan, AZ1022 +994 12 490 77 47/48/49 +994 12 490 77 50 baku$moore . az www.moOre.az INDEPENDENT AUDITORS' REPORT To the Management of State Agency of Azerbaijan Automobile Roads Opinion We have audited the accompanying special purpose project financial statements of the Third Highway Project and Additional Financing (the "Project"), implemented by State Agency of Azerbaijan Automobile Roads (the "Project Executing Agency"), which comprise the special purpose project statement of financial position, the special purpose project statement of sources and uses of funds, the special purpose project statement of project activities and special purpose project statement of special and project accounts as of and for the four months ended 30 April 2021 and year ended 31 December 2020 and notes, comprising a summary of significant accounting policies and other explanatory information. In our opinion, the accompanying special purpose project financial statements for the four months ended 30 April 2021 and year ended 31 December 2020 are prepared in all material respects, in accordance with financial reporting provisions of the Loan agreement No. 7889 dated 11 August 2010 between Government of the Republic of Azerbaijan ("Borrower") and International Bank for Reconstruction and Development ("IBRD") and Loan agreement No. 8602 dated 7 April 2016 between Government of the Republic of Azerbaijan ("Borrower"), International Bank for Reconstruction and Development ("IBRD") and International Development Association ("IDA"), and Financial agreement for Credit No. 4723 dated 11 August 2010 between Government of the Republic of Azerbaijan ("Borrower") and the International Development Association ("IDA"), collectively the "Financing Agreements". Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs) applicable to the audit of financial statements and to compliance auditing, with special reference to ISA 800. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Project in accordance with the ethical requirements that are relevant to our audit of the financial statements in Azerbaijan, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Responsibilities of Management and Those Charged with Governance for the Special Purpose Financial Statements Management is responsible for the preparation and fair presentation of the special purpose project financial statements in accordance with the financial reporting provisions of the financial agreements and for such internal control as management determines is necessary to enable the preparation of the special purpose project financial statements that are free from material misstatement, whether due to fraud or error. Those charged with governance are responsible for overseeing the Project's financial reporting process. J C, gj , r- Era.gid;' : ' ~ ,A c -Jv-v a fl I.I~T. J ne:b~r flir er <' ir:9oh rri,*I rIipcJ .CmtY Tillir:..1 M Cl 09 thC-E3Pot woriat16 S MOORE Auditors' Responsibility for the Audit of the Special Purpose Project Financial Statements Our objectives are to obtain reasonable assurance about whether the special purpose project financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these special purpose project financial statements. As part of our audit in accordance with ISAs, we exercise professional judgement maintain professional scepticism throughout the audit. We also: - identify and assess the risks of material misstatement of the special purpose project financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, international omissions, misrepresentations, or the override of internal control. - obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control. - evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. - evaluate the overall presentation, structure and content of the special purpose project financial statements, including the disclosures, and whether the special purpose project financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 2Ju20 0.ffice 23 June 2021 --r-,d * 'Nw -)r d. г css cv в ct� сп cv сэ с� со и�л �- аг� г г tS7 i- М� т С� vl СЭ � м г С ёtS С7_ [У3 �- Ci7 �r С7 с�7 [+] С7 м е� м [r} т� е� �#' сУ7 е0 о c�S �.с7 tC7 � e,U � �S7 � CJ Cii <3' N С7 г�'7 iKS 4� CV � а�+ cv т с� са м сд ав со ао � м ,�,, Е � � Г г � `д г � Г�с�в�мгs� � �i+й с.� � .ц о �� � а г и, С7 С1} м � ш Е� � � У � у � •� CS ifl Cs тt Os С73 г� С? 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BACKGROUND The Third Highway Project (the "Project") was established in Azerbaijan in accordance with the Loan Agreement No. 7889 AZ signed on 11 August 2010 between the Republic of Azerbaijan (Borrower) and the International Bank for Reconstruction and Development ("I BRD") and Financing agreement No. 4723- AZ signed on 11 August 2010 between the Republic of Azerbaijan and the International Development Association ("IDA:'). The Project is implemented by State Agency of Azerbaijan Automobile Roads (the "Project Implementing Entity"). The Project Implementing Entity has been established by Presidential degree on the Measures to Improve Management of Transport and Road Complex No. 1992 dated 22 February 2007. The objectives of the Project are to contribute to a more efficient and safer Baku- Shamakhi road and higher quality road services as part of the general network upgrading to motorway standard, and to improve the management of the nascent motorway network. The Project consists of the following parts: Part A: Motorway I morovemen Upgrading the existing two lane Baku-Shamakhi road to a four lane motorway and the related road safety activities, through the carrying out of works and provision of goods and consultants' services. Provision of consultants' services for the supervision and technical audit of the above mentioned road and the design of priority investments of the main road network. Part B: Institutional Development Preparation of a study to explore options for a policy on management and financing and efficient allocation of resources for Azerbaijan's motorways, through the provision of consultants' services and training, Institutional development of the ARS in motorway operation and maintenance by. (a) establishing motorway guidelines; (b) testing a small experimental motorway management unit at ARS: and (C) carrying out an operations and maintenance pilot on sections of existing motorways, through the provision of goods, consultants' services and training. Part C: Project Management Supporting the Project management capacity of the PIU, through the provision of goods, consultants' services and training, Below stated details of funding Financial agreements of the Project % of expenditure Note Amount to be financed International Bank for Reconstruction and Development: Loan No. 7889, USD A 171,600,000 75% International Bank for Reconstruction and Development and International Development Association: Loan No-8602, USD B 76,000,000 90% International Development Association: Loan No.4723, SDR C 46,200,000 75% The Loan agreement No. 7889 and Financing agreement No. 4723 was signed on 11 August 2010 between respectively, Republic of Azerbaijan (Borrower) and International Bank for Reconstruction and Development ("IBRD") and between Republic of Azerbaijan (Borrower) and International Development Association ("IDA"), while Loan agreement No. 8602 was signed on 7 April 2016 and amended on 18 June 2020 between Republic of Azerbaijan (Borrower) and International Bank for reconstruction and Development (" I B R D") and I nternationa I Development Association (" I DA") (the " Financial ag reements"). 10 THIRD HIGHWAY PROJECT AND ADDITIONAL FINANCING NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS (CONTINUED) FOR THE FOUR MONTHS ENDED 30 APRIL 2021 AND YEAR ENDED 31 DECEMBER 2020 (Expressed in US dollars) 1. BACKGROUND (Continued) A. The financing of Loan No. 7889 is implemented through the following categories: Amount of the Loan % of expenditure to be Allocated, USD financed 1. Goods, works, consultants' services including Audit, training, and incremental 171,171,000 75% operating costs Amount payable pursuant to 2. Front-end Fee 429,000 Section 2.03 of the Loan Agreement No. 7889 AZ. 3, Premia for Interest Rate Caps and Amount due under Section Interest Rate Collars - 2.07 (c) of the Loan ________________ Agreement No. 7889 AZ. Total Amount 171,600,000 The Borrower pays to the bank a front-end fee in an amount equal to one quarter of one percent (0.25%) of the amount of the Loan. After the effective date of the Project, the IBRD, on behalf of the Borrower, withdrawn from the Loan Account and paid to itself the amount of such fee. The Project was expected to be completed by 31 March 2016. B. The Additional Financing for Third Highway Project of the Republic of Azerbaijan (the "Project") was established in Azerbaijan in accordance with the Loan Agreement No. 8602 AZ signed on 7 April 2016 between the Republic of Azerbaijan (Borrower) and the International Bank for Reconstruction and Development ("IBRD") and the International Development Association ("IDA"). The financing of Loan No. 8602 is implemented through the categories: Amount of the Loan % of expenditure to be financed Allocated, USD % of exenditur to be inance 1. Goods, works, consultants' services, non-consulting services, Training and 75,650,000 90% Incremental Operating Costs under the Project Amount payable pursuant to 2. Front-end Fee 350,000 Section 2.03 of the Loan Agreement No. 8602 AZ. 3. Interest Rate Caps and Interest Rate Amount due under Section Collars premium - 2.08 (c) of the Loan Agreement No. 8602 AZ. Amount cancelled pursuant to 4. Cancelled as of 28 April 2020 64,000,000 Section 7.01 of General Conditions Total Amount 140,000,000 C. International Development Association ("IDA") extends the Credit No. 4723 AZ in an amount SDR 46,200,000. The financing of Credit is implemented through the following categories: Amount of the Amount of the % of Loan Allocated, Loan Allocated, expenditure to SDR USD be financed 1. Goods, works, consultants' services including Audit, training, 46,200,000 70,000,000 75% and incremental operating costs Total Amount 46,200,000 70,000,000 At the date of financial agreement signature, the exchange rate for SDR was USD 1.515 as at signed agreement. D. The Government of Azerbaijan is 100% of responsible for Value added tax (VAT). 11 THIRD HIGHWAY PROJECT AND ADDITIONAL FINANCING NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS (CONTINUED) FOR THE FOUR MONTHS ENDED 30 APRIL 2021 AND YEAR ENDED 31 DECEMBER 2020 (Expressed in US dollars) 2. SIGNIFICANT ACCOUNTING POLICIES 2.1 Basis of Accounting These special purpose project financial statements are prepared in accordance with the International Public Sector Accounting Standard ("IPSAS") Financial Reporting under the Cash Basis of Accounting issued by the International Public Sector Accounting Standards Board ("IPSASB"), an independent standard-setting body within the International Federation of Accountants ("IFAC") and incorporate the following principal accounting policies, which have been consistently followed in all material respects and comply with the "Guidelines: Annual Financial Reporting and Auditing for World Bank - Financed Activities" issued by the World Bank's Financial Management Sector Board. These Special Purpose Financial Statements have been prepared under the historical cost convention. Project financing is recognised as a source of project funds when the cash is received. Project expenditure is recognised as a use of project funds when payment is made. 2.2 Period of accounts These special purpose financial statements cover the four months ended 30April 2021 and year ended 31 December 2020. 2.3 Transactions and balances in foreign currencies The national currency of the Republic of Azerbaijan, where the Project is implemented, is the Azerbaijani manat ("AZN"). The special purpose project financial statements are presented in US dollar. All financial information presented in US dollar has been rounded to the nearest US dollar. Transactions in other currencies are treated as transactions in foreign currencies. Cash receipts and payments arising from transactions in a foreign currency are recorded in the Project's reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of receipt and payment. Cash balances held in a foreign currency are reported using the closing rate, which is the spot exchange rate at the reporting date. Unrealised gains and losses arising from changes in foreign currency exchange rates are not cash receipts and payments. The effect of exchange rate changes on cash held in a foreign currency is reported in the statement of sources and uses of funds and other statements in order to reconcile cash at the beginning and the end of the period. These amounts are presented separately from cash receipts and payments and include the differences, if any, had those cash receipts and payments and balances been reported at end-of-period exchange rates. At 30 April 2021 and 31 December 2020, the official AZN/USD exchange rate set by the Central Bank of Azerbaijan ("CBAR") was AZN 1.7000 (31 December 2019: AZN 1.7000). 2.4 Method of withdrawal The Project applies the following methods of withdrawal: 2.4.1 IBRD Special Account: Special Account is a designated disbursement account of the Project to effect the payment of eligible expenditure, within defined limits, which does not require individual authorisation from the IBRD. The Project maintains a Special Account with the International Bank of Azerbaijan. Available amounts were drawn down within the limits determined by the relevant loan agreement for the payment of eligible expenditure for the project from the Special Account. 2.4.2 Direct payments from the IDA Loan account: Under this method, the Project Management prepares Applications based on supporting documents which are submitted to the IDA. During the period from 15 January 2020 till 30t April 2021 no direct payments were made to the contractors. 2.4.3 Project account: The Project maintains a separate account where the Government of Azerbaijan funds are accumulated. The funds are further disbursed to contractors based on the shares of expenditure to be incurred by each. The accumulated project financing is disclosed under "Funds" in the Special Purpose Project Statement of Sources and Uses of Funds. 12 THIRD HIGHWAY PROJECT AND ADDITIONAL FINANCING NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS (CONTINUED) FOR THE FOUR MONTHS ENDED 30 APRIL 2021 AND YEAR ENDED 31 DECEMBER 2020 (Expressed in US dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.4 Method of withdrawal (Continued) 2.4.4 Statement of expenditure ("SOE"): The Project forwards to the Kapital Bank an Application for reimbursement of payments already made using an Application for Withdrawal with SOE forms as the only documentation- 2.4.5 Incremental Expenses: Incremental expenses incurred on account of project implementation, management and monitoring, including office supplies, travel and salaries, but excluding the salaries of the civil servants. 3. CASH IN BANK 30 April 31 December 31 December 2021 2020 2019 IBRD No 7889 AZ Special Account, USD - - IBRD No. 8602 AZ Special Account, USD - 702,466 535,022 IDA No.4723 AZ Special Account, USD - - Borrower Project Account, USD 119,830 116,293 1,318,590 Total cash in bank 119,830 818,759 1,853,612 4. CLOSING DATE OF THE PROJECT The Project is expected to be completed by 30 April 2021. 13 й `� с°�� �� � й й � 3 С� f£} sD � t'°} � �.. 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