MINISTRY OF FINANCE NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT (IRCP) INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P-159330 REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Table of contents Page Key Information 1-2 Statement of Directors' responsibility 3 Independent Auditor's Report 4-9 Statement of Financial Position 10 Cash flow statement 11 Notes to the Financial Statements 12-24 Statement of Sources and Application of Funds 25-26 KEY INFORMATION 1. Background information The National Road Fund Agency was established by the National Road Fund Act No. 13 of 2002. According to Part II of the National Road Find Act, the key functions of the Agency are, among others: a. Administer and manage the Road Fund; b. Prepare and publish audited annual accounts of the Road Fund c. Recommend to the Minister Fuel Levy and other road user charges and tariffs as required. d. Recommend to the Minister projects for funding; e. Allocate resources - For the construction, maintenance and rehabilitation of roads based on a percentage of annual work programme of the Road Development Agency; For road transport, traffic and safety management based on a percentage of the annual work programme of the Road Transport and Safety Agency. In consultation with Road Development Agency, recommend funding for development of new roads and undertake such other activities as are conducive or incidental to its functions under this Act. 2. The Road Fund shall consist of a. Such monies as may be appropriated by Parliament for the purposes of the Road Fund; b. All fuel levy collected, less the cost of collection which shall not exceed three per cent, in every fiscal year" c. Such percentage of licence fees, registration fees and International transit fees payable to the Road Transport and Safety Agency under the Road Traffic Act, as the Minister may determine; d. Such percentage of road user levies including tariffs, taxes and tolls as may be determined by the Minister on the recommendation of the agency in consultation with Road Development Agency; and e. Such monies as may be paid to the Road Fund by way of loans, grants or donations. Pursuant to the Tolls Act No. 14 of 2011 which mandates the Road Development Agency (RDA) to appoint any suitable person(s) as Toll Collector, the Government through the Road Development Agency appointed NRFA as lead Toll collector in August 2015. In this regard, RDA appointed NRFA as authorized Toll Collector for inland Toll sites in line with Statutory Instrument No. 73 of 2013 (hereinafter referred to as Tolling regulation) under first schedule (Regulation 3). In addition, NRFA was mandated to collect toll fees at the port of entry in accordance with the provisions of the Toll Act. 3. Principal Activities The NRFA is a statutory organisation whose function is to plan, manage and co-ordinate finances for the activities in the annual work plans of the Government Agencies/Institutions in the Road sector. 4. Project Information Name of Projects Improved Rural Connectivity Project Project Number P159330 Loan Agreement No. Financed by World Bank Executing Agency Road Development Agency 1 5. Agency Operational Funding Source According to part v, section 18 (a) of the National Road Fund Act, a GRZ Grant for operations is appropriated to the Agency by parliament for the purpose of the Agency. According to part iv ,section 17(c) of the National Road Fund Act the Agency shall apply the monies of the Road Fund for the Agency, the Road Development Agency and the Road Transport and safety Agency provided that the money paid out of Road Fund for the operations of the three Agencies shall not exceed ten per centum of the monies paid into the Road Fund. 6. Directors The directors who held office during the year and to the date of this report were: a. Ms Board Chairman Michel Banda - Chairperson - Retired 6th December 2021 b. Mr Kaitano Chungu - Vice Chairperson- Retired 61h December 2021 c. Ms Mumeka Walumweya - Director-Retired 61h December 2021 d. Mr Joe Simachela - Director-Retired 61h December 2021 e. Ms Mwenya Kapasa - Director-Retired 6th December 2021 f. Mr. Nicholas Chikwenya - Director-Retired 6th December 2021 g. Eng Jones Chomba - Director-Retired 61h December 2021 h. Mr. Emmanuel Gardner - Director-Retired 61h December 2021 i. Dr. Lubinda Haabazoka - Director-Retired 6th December 2021 j. Mr Mukuli Chikuba - Director-Retired 6th December 2021 k. Mr Gladwell Banda - Director-Retired 6th December 2021 1. Eng. Elias Mwape - Director-Retired 6th December 2021 m. Eng George Manyele - Director-Retired 6th December 2021 n. Eng. Wallece Mumba - Director/CEO - Secretary Subsquent to the year end the following new Board of Directors was appointed on the 23rd June, 2022 and the Board dissolved on 8th October 2022: a. Mr Joe Mutwale - Chairperson b. Dr.Chabuka J. Kawesha - Vice Chairperson c. Mrs. Moonde Muyunda Chituta - Director d. Mr Ismail Mullah - Director e. Ms Nsandi Manza - Director f. Mr.Gibson Masumba - Director g. Mr.Stephen Mbewe - Director h. Mr. Ernest Nshindano - Director i. Ms Jane Banda - Director j. Mr. Agalasia Mary-Ann Chisenga - Director k. Ms. Sandra Mukuka Malupande - Director I. Col Kennedy Simukanga(Retired) - Director m. Eng. Alinani Msisya - Ex-Officio n. Eng George Manyele - Ex-Officio o. Eng. Wallece Mumba - Director /CEO Subsequent to the above new Board of Directors dissolution on 8th October 2022, the Minister of Finance and National Planning appointed an Interim Board of Directors on 14th October 2022 as follows: a. Mr. Danies Chisenda - Interim Chairperson b. Ms. Nsandi Manza - Director 7. Independent Auditors Lusaka Mark Daniels Chartered Accountants CHAZ Complex Plot 2882/B/5/1 0 Suite F3-10/F3-11 Off Great East Road, Mission Drive Waterfalls LUSAKA 2 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT (IRCP) INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P-1 59330 REPORT AND FINANCIAL STATEMENTS Statement of directors' responsibilities and approval of the financial statements The Project Number P159330 and IDA No.60390 , The Improved Rural Connectivity Project Loan Agreed Schedule 2,Section 1 (a) requires the National Road Fund Agency directors to prepare for each financial year audited project annual statements. It also requires the Directors to ensure that the Project keeps proper accounting records that disclose, with reasonable accuracy, the financial position of the Project. The Directors are also responsible for safeguarding the assets of the Project. The Directors accept responsibility for the preparation and fair presentation of the Improved Rural Connectivity Project financial statements, which comprise the statement of financial position as at 31 December,2021 and the statement of cash flows for the year then ended, and notes to the financial statement, including a summary of significant accounting policies as set out on pages 6 and 13 and other explanatory notes, in accordance with International Public Sector Accounting Standards (IPSAS) and the requirements of the Project Number P159330 and IDA No.60390 The directors are also responsible for such internal control, as they determine necessary to prepare the financial statements that are free from material misstatements, whether due to fraud or error. Nothing has come to the attention of the directors to indicate that the Project will not remain a going concern for at least twelve months from the date of this statement Eng. Wallece Mumba Mr. Danies K Chisenda Director/Chief Executive Officer Interim Board Chairperson and Permanent Secretary - Economic Management and Finance (PS - EMF) Ministry of Finance and National Planning 2023 3 Audit* Advisory *Tax MARK DANFEPSRT OF THE INDEPENDENT AUDITOR -C[ARfFEREDACCOUNTJDTHE BOARD MEMBERS OF NATIONAL ROAD FUND AGENCY Report on the Audit of the Financial Statements Opinion We have audited the accompanying financial statements of the The Improved Rural Connectivity Project Project Number P159330 and IDA No.60390 African, which comprise the Statement of Financial Position as at 31 December 2021 and a summary of significant accounting policies and other explanatory notes. In our opinion the financial statements give a true and fair view of the Financial Position of the The Improved Rural Connectivity Project Project No.P159330/IDA 60390 as at 31 December 2021 and of its financial performance and cash flows for the year ended and have been properly prepared in accordance with the International Public Sector Accounting Standards (IPSAS) and as required by The Improved Rural Connectivity Project Project Loan No.P159330/IDA 60390 Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs), 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 International Development Association Credit Agreement P 159330 Phase ii in accordance with the International Ethics Standards Board for Accountants' Code of Ethics (IESBA Code), and we have fulfilled our other ethical responsibilities' in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other information Management is responsible for the other information. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. i) Capital grants The project's implementation is premised on grant funding. Non-compliance with grant terms and conditions has a significant impact on project continuity. Accordingly, the capital grants are considered to be a key audit matter, and disclosures related thereto are included in Note 15. 4 CHAZ COMPLEX, Plot No. 2882/B/5/10, Third Floor, Suite F3-10/F3-11 Off Great East Road, Mission Drive, Waterfalls, P.0 Box 33919, Lusaka, Zambia. Tel: +260-211- 291401/Cell: 0962-059690/0979-835430, E-mail: markdaniels@markdaniels.co REPORT OF THE INDEPENDENT AUDITOR TO THE BOARD MEMBERS OF NATIONAL ROAD FUND AGENCY (CONTINUED) Our procedures included: Inspection of the grant agreements, noting the salient terms and conditions; direct confirmation of disbursements with the granting authority; enquiries of management and those charged with governance of the Implementing Agency on compliance with grant terms. ii) Capital work in progress rehabilitation costs Capital work in progress rehabilitation costs and valuation thereof are a key performance indicator of the project implementation status and as such are considered to be a key audit matter, and disclosures related thereto are included in Note 8. Our procedures included: Review of procurement procedures to determine whether sound commercial practices had been used, reasonable prices were obtained, and adequate controls were in place over related costs. Physical verifications of construction work at sites were undertaken to verify that works were performed to the required standards, and in accordance with the terms of the agreements. iii) Financial Statements Presentation and Classification Financial statements Presentation and classification is considered a Key Audit Matter because most project transactions are with non-Zambian resident suppliers whose contracts are US dollar-based, while receivables in US dollar are due from the main contractors. Exchange rate application poses the most significant risk of financial statements misstatements in the sense that the contract value, while set in ZMW terms, is intact partially protected(hedged) in US $ terms in accordance with the contract agreed proportions. Conversion and retranslation of US$ protected contract values requires to be made at protected exchange rates; and closing balances then translated to ZMW and US$ for financial statement presentation purposes. If not correctly done, this could lead to material misstatements in both valuation and classification of financial statement components involved (As further explained at Accounting Policy 4.4) Our procedures included: For purposes of financial statements dual currency reporting in accordance with the Project accounting policies the process of conversion into ZMW and USD is as follows, we carried out a comprehensive review of the schedules prepared by Management in order to ensure that the correct exchange rate had been applied by each transaction, and valuation and classification at balance sheet date, where applicable. 5 REPORT OF THE INDEPENDENT AUDITOR TO THE BOARD MEMBERS OF NATIONAL ROAD FUND AGENCY (CONTINUED) iv) Prior Period Adjustments Prior Period Adjustments posed a significant risk in this financial reporting period after it was determined that various transactions and balances as explained at Note 6, had not been accounted for in accordance with the requirements of International Public Sector Accounting Standards and the Provisions of the ADB loans agreements, As such, it was considered a Key Audit Matter because any misstatements would affect the valuation of affected prior and current year figures, as well as monitoring of the Project through key indicators which are dependent on the restated amounts and those prospectively accounted for. Our procedures included: Our procedures included a review of the contractor contracts affected and the certificates of Contract work in progress to ensure that it was accounted for in accordance with the contract provisions and valued, and classified accordingly. v) Provision for Uncertified Contract Work Provisions relate mainly to uncertified contract as at the reporting date for which the consultant makes an estimate. This requires a considerable amount of judgement. The amounts involved are generally material and misstatements therein could significantly affect the value of the project at a reporting date; and key performance indicators (See Note 14). Our procedures included: Examining the working papers prepared by the Project Engineer, and the assumptions made in arriving at the provision. Where approved valuation certificates relating to the provision were available, we checked the reasonableness of the provision against the approved post year-end certificate. Other information The directors are responsible for the other information. The other information comprises the Project Information on page 1; and the statement of directors' responsibilities on page 2. The other information does not include the financial statements and our auditor's report thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements, or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained before the date of this auditor's report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard 6 REPORT OF THE INDEPENDENT AUDITOR TO THE BOARD MEMBERS OF NATIONAL ROAD FUND AGENCY (CONTINUED) Responsibilities of Management and those charged with Governance for the Financial Statements The directors of the National Road Fund Agency are responsible for the preparation and fair presentation of the financial statements in accordance with International Public Sector Accounting Standards by The Improved Rural Connectivity Project Project Loan No.P1 59330/IDA 60390; and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the by The Improved Rural Connectivity Project Project Loan No.P159330/DA 60390's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and, using the going concern basis of accounting, unless the directors either intend to liquidate the Improved Rural Connectivity Project Project Loan No.P1 59330/IDA 60390's or to cease operations, or have no realistic alternative but to do so. Those charged with governance are responsible for overseeing the by The Improved Rural Connectivity Project Project Loan No.P159330/DA 60390s financial reporting process. Auditor's Responsibility for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the 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 users' economic decisions, taken based on these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: * Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit 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, intentional omissions, misrepresentations, or the override of internal control; * Obtain an understanding of internal controls relevant to the audit to design audit procedures that are appropriate in the circumstances, but not to express an opinion on the by The Improved Rural Connectivity Project Project Loan No.P159330/IDA 60390's internal controls; * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors; 7 REPORT OF THE INDEPENDENT AUDITOR TO THE BOARD MEMBERS OF NATIONAL ROAD FUND AGENCY (CONTINUED) * Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the by The Improved Rural Connectivity Project Project Loan No.P159330/IDA 60390's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or to modify our opinion if such disclosures are inadequate. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the by the Improved Rural Connectivity Project Project Loan No.P159330/IDA 60390 to cease to continue as a going concern; * Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation; and * Obtain sufficient and appropriate audit evidence regarding the financial information of the entities or business activities of the by The Improved Rural Connectivity Project Project Loan No.P159330/IDA 60390 to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the by The Improved Rural Connectivity Project Project Loan No.P159330/IDA 60390audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 8 REPORT OF THE INDEPENDENT AUDITOR TO THE BOARD MEMBERS OF NATIONAL ROAD FUND AGENCY (CONTINUED) Report on other Legal and Regulatory Requirements In accordance with the requirements of the by The Improved Rural Connectivity Project Project Loan No.P159330/IDA 60390i) African Development Bank funds have been used in accordance with the Agreement i) All IDA Funds have been used in accordance with the relevant financing agreements. ii) Goods and services financed have been procured in accordance with the relevant financing agreement. iii) All necessary supporting documents, records and accounts have been kept in respect of all Project activities, including expenditures reported using the summary Statements of Expenditure (SOEs) and all information and explanations necessary for the purpose of the audit have been obtained. iv) The summary of SOEs submitted during the period can be relied upon to support the related withdrawal applications. Chartered Accountants d'-2023 Lusaka Frederick Banda AUD/F000169 Partner signing on behalf of the firm 9 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT (IRCP) INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P-1 59330 STATEMENT OF FINANCIAL POSITION FOR THE YEAR ENDED 31 DECEMBER 2021 Year ended Year ended Year ended Year ended Notes 31 December 31 December 31 December 31 December 2021 2021 2020 2020 ZMW US$ ZMW US$ Assets Current Assets Cash and Bank 6 58,923,775 3,545,353 228,457,881 10,806,901 Advances to Contractors and Cosultants 7 23,377,508 1,406,589 56,964,349 3,435,926 82,301,283 4,951,942 285,422,230 14,242,827 Non - Current Assets CWIP - Road Works Construction Costs 8 487,271,999 30,172,864 161,520,784 10,572,913 Other Project Cost 9 87,265,725 5,392,453 78,109,972 4,841,568 Property, Plant & Equipment 10 8,086,366 1,119,680 19,210,224 1,787,664 582,624,090 36,684,997 258,840,980 17,202,145 Total Assets 664,925,373 41,636,939 544,263,210 31,444,972 Liabilities Current Liabilities Road Works and Services Liabilities 11 6,586,402 396,293 3,036,518 143,639 Total Liabilities 6,586,402 396,293 3,036,518 143,639 Non- Current Liabilities Non-exchange Transfers-IDA ICRP Capital Grant 13 658,338,971 41,240,646 541,226,692 31,301,333 Total Liabilities and Accum Funds 664,925,373 41,636,939 544,263,210 31,444,972 The Firancial Statements on 10 to 20 were approved by the National Road Fund Agency on .. 2 'and were signed on its behalf by: Eng. Wallece Mumba Mr. Danies K Chisenda Director/Chief Executive Officer Interim Board Chairperson and Permanent Secretary - Economic Management and Finance (PS-EMF) Ministry of Finance and National Planning The notes on pages 12 to 23 form part of these financial statements. 10 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT (IRCP) INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P-159330 STATEMENT OF CASHFLOW FOR THE YEAR ENDED 31 DECEMBER 2021 Yearended Yearended Yearended Year ended 31 December 31 December 31 December 31 December 2021 2021 2020 2020 ZMW US$ ZMW US$ Cash generated from operating activities Decease/(increase in receivables - - 1,611,556 115,029 Increase/(decrease) in payables 3,549,884 252,654 1,786,798 54,437 Net cash outflow from operating activities 3,549,884 252,654 3,398,354 169,466 Investing Activities Increase in Non-Current Assets (281,040,516) (16,902,630) (144,005,842) (7,498,715) Project Cost (9,155,753) (550,885) (78,109,972) (4,841,568) Net cash used on Investing activities (290,196,269) (17,453,515) (222,115,814) (12,340,283) Financing activities Capital Grants 117,112,279 9,939,313 324,557,762 14,225,571 Net cash from financing activities 117,112,279 9,939,313 324,557,762 14,225,571 Net Increase in cash and cash equivalents (169,534,106) (7,261,548) 105,840,302 2,054,754 Cash and cash equivalents at beginning of the Period 228,457,881 10,806,901 122,617,579 8,752,147 Cash and Cash equivalents at end of the Period 58,923,775 3,545,353 228,457,881 10,806,901 The notes on pages 12 to 24 form part of these financial statements. 11 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT (IRCP) INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P-159330 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Principle activity and financing of the Improved Rural Connectivity Project The Second Road Rehabilitation and Maintenance Project Phase 11 is financed by the World Bank- International Development Association (IDA). The total credit under this Development Credit Agreement (DCA) P159330 is US$200,000,000. This amount is split as follows: Amount (US $) Improvement of feeder roads 180,000,000 Institution strengthening in the road sector 20,000,000 Total 200,000,000 The Republic of Zambia and the International Development Association (IDA) signed the Project Preparation Advance (PPA) Agreement on 13 September 2017 for total funding of US $3.00 million. The IDA Project P159330 was approved by the Board of the World Bank on 4th May 2017. The Financing Agreement was signed on 13th September 2017 between the Republic of Zambia and the International Development Association (IDA) and the main Credit will become effective in 2018. The closing date of the credit will be in 2026. The objective of the Improved Rural Connectivity Project for Zambia are to:(1) Improve the Recipient's rural road accessibility for the communities in selected areas; (2) Strengthen institutional capacity for sustainable management of rural roads; and (3) Respond promptly and effectively to an Eligible Crisis or Emergency. There are three components for this project. The first component is improvement of feeder roads, will support the upgrading, rehabilitation and maintenance of priority feeder road infrastructure in six top ranked provinces i.e. central, Eastern, Northern, Luapula, Southern and Muchinga. It will finance about 4300km of feeder roads comprising mainly of roads improved to gravel wearing course standard. The project will also finance roads improvement to low cost seal standards where projected vehicular traffic would be in excess of 50 to 100 vehicles per day (VPD). The second component is the Institutional Strengthening in the roads sector(US20m).it has two sub component,(i) Coordination and Implementation support will reinforce the project coordination and implementation roles of the entities concerned (ii)Strategic Institutional Capacity Enhancement which will include technical services, physical woks, goods and material for the purpose of institution strategic capacity enhancement within the sector, and human resource development. The third component is contingent emergency response which will allow for rapid reallocation of the project proceeds in the event of natural or man-made disaster or crisis that has caused or likely to imminently cause a major adverse economic and /or social impact. 12 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT (IRCP) INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P-159330 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 2. Statement of Compliance The financial statements have been prepared in accordance with, and comply with, Accruals Basis International Public Sector Accounting Standards (IPSAS); except that, (i) Presentation of the Statement of Financial Performance is not required as the project has no income-generating activities of its own, as all project flows are either Project Costs or Grants (Refer to Notes 9 and 13); and (ii) The Statement of Changes in Net Assets is not required as the project is wholly funded by Non-Current Liabilities (Capital Grants). These financial statements are presented in Zambian Kwacha (ZMW) and United States Dollars (USD), the project's functional and reporting currencies. 3. Basis of preparation The financial statements have been prepared on an accrual basis and in accordance with the historical cost convention, unless stated otherwise in the accounting policies below. 4. Summary of significant accounting policies The principal accounting policies applied in the preparation of the financial statements are stated below. These policies have been consistently applied to all the years presented and comply with International Public Sector Financial Reporting Standards in all material respects unless otherwise stated. 4.1 Project costs The cost of an item is recognised as part of project costs when it is probable that future economic benefits associated with the item will flow to the The Improved Rural Connectivity Project Project Loan No.P159330/IDA 60390 and the cost of the item can be measured reliably. Project costs include all costs incurred in the construction or rehabilitation of the The Improved Rural Connectivity Project Project Loan No.P159330/IDA 60390 Network. These comprise civil works relating to reconstruction and rehabilitation costs; Consultancy costs in respect of Design Review and Supervision of Construction works (including Project Financial Audits and Technical Audits). All project costs are capitalised during the construction and rehabilitation period and will ultimately be transferred to the government on completion of the project, as evidenced by a completion certificate being issued by the implementation institution, the Road Development Agency. Thereafter, the project will either be expensed to the Statement of Financial Performance on a systematic and rational basis over the useful lives of the project assets; or written off immediately to the Statement of Financial Performance, depending on the accounting policy adopted by the recipient entity. 13 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P159330 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 4.2 Non-exchange transactions: Government Grants Government grants are not recognised until there is reasonable assurance that the project will comply with the conditions attaching to them and receive the grant. Government grants whose primary condition is that all funds provided should be used for the road rehabilitation of the The Improved Rural Connectivity Project Loan No.P159330/IDA 60390 are recognised as deferred income in the Statement of Financial Position; until completion of the project. A completion certificate will be issued by the implementing institution, the Road Development Agency; after which the project will be expensed to the Statement of Financial Performance on a systematic and rational basis over the useful lives of the project assets or written off immediately depending on the accounting policy adopted by the receiving entity, in accordance with the requirements of IPSAS 23, Revenue from Non-Exchange Transactions. 4.3 Project costs recognition The cost of an item is recognised as part of project costs when it is probable that future economic benefits associated with the item will flow to the The Improved Rural Connectivity Project Project Loan No.P1 59330/IDA 60390 and the cost of the item can be measured reliably. Project costs include all costs incurred in the construction or rehabilitation of the The Improved Rural Connectivity Project Project Loan No.P159330/IDA 60390 Network. These comprise civil works relating to reconstruction and rehabilitation costs; Consultancy costs in respect of Design Review and Supervision of Construction works (including Project Financial Audits and Technical Audits). All project costs are capitalised during the construction and rehabilitation period and will ultimately be transferred to the government on completion of the project, as evidenced by a completion certificate being issued by the implementation institution, the Road Development Agency. Thereafter, the project will either be expensed to the Statement of Financial Performance on a systematic and rational basis over the useful lives of the project assets; or written off immediately to the Statement of Financial Performance, depending on the accounting policy adopted by the recipient entity. 4.4 Foreign currencies and hedging The Financial Statements are prepared and reported in dual currency in accordance with the project accounting policies and average exchange rates are used in the process of conversion into ZMW and USD. The two main contractors' contract values are quoted in Zambian Kwacha; they are significantly hedged in United States Dollar terms in accordance with contract agreed proportions. The contract value portion payable in ZMW and USD are computed using the apportionment percentages provided in the contract. 14 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P159330 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 4 Summary of significant accounting policies (continued) 4.4 Foreign currencies and hedging (continued) Therefore, upon the valuation of contract work in progress, or determining advance payments based on the ZMW denominated, the amounts are split into the USD component using the contract agreed exchange rate to arrive USD amounts payable. For financial statements reporting purposes in ZMW terms, the dollar denominated payments are then converted to Kwacha using the USD/ZMW market rate applicable. For purposes of dual currency reporting in accordance with the Project accounting policies the process of conversion is as follows: (i) The contract value portion payable in ZMW is computed using the apportionment percentages provided in the contract; (ii) ZMW protected contract amounts are converted from ZMW to USD using the protected contract rate; (iii) The USD amounts are converted from ZMW by applying the protected exchange rate. When paid in USD, they are converted to ZMW using Zambian currency market rate; (iv) For purposes of financial statements reporting in ZMW, the contract amounts due in ZMW terms are aggregated with the ZMW equivalent of the amounts paid in USD to arrive at the total ZMW for each contract payment. This is reported in the "K" column of the financial statements; and (v) For purposes of financial reporting in USD, the total ZMW amounts arrived at in (iv) above are converted into USD by applying the average of the offer and selling exchange rates prevailing at the date of financial reporting. All other transactions in USD are converted to ZMW using the rate of exchange prevailing at the date of transaction. At the year-end, foreign monetary assets and liabilities are converted at the average of the offer and selling exchange rates prevailing at the end of the year. The resulting exchange differences are recognized in Project Costs in the Statement of Financial Position. Non-monetary foreign currency items based on historical costs are not retranslated. 15 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P159330 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 4.5 Financial Instruments Initial measurements Financial assets and financial liabilities are recognised when the project becomes a party to the contractual provisions of the instruments. Financial Instruments (assets and liabilities) are initially measured at the transaction price (this includes transaction cost except in the initial measurement of financial assets and liabilities measured at fair value, through Project Costs). If the arrangement constitutes a financing transaction, it is then measured at the present value of the future payments, discounted at a market-related interest. Financial Instruments entered into by the project are mainly classified as loans and receivables, and consist of the following financial assets and liabilities: Financial Assets Advances to contractors and consultants Advance Payments constitute an interest-free loan provided to a contractor or supplier of goods and services at the commencement of a contract (usually 20% of contract value), for mobilisation and cash flow support. The advance is repayable over the period of the contract, through percentage deductions from Interim Payments at the amortisation rate stated in the contract. Performance guarantees issued against these advances remain in force until the Advance Payments are fully recovered. Advances to Contractors and Consultants are classified as financial assets and subsequently measured at amortised cost using the effective interest method after initial recognition. Financial liabilities Road works and service liabilities Road work service liabilities and other accruals are classified as financial liabilities and subsequently measured at amortised cost using the effective interest method after initial recognition. Contract work Retentions withheld Contract work Retentions are monies withheld from each invoice submitted for contract work certified by a contractor (usually 10% of invoiced amount) to cater for completion of outstanding work, remedying of any defects attributable to the contractor noted during the Defects Notification Period incorporated in the contract agreements; and is only payable upon certification by the employer's consultant and upon issuance of a Performance Certificate by the Consultant, stating the date on which the contractor fully discharged his obligations under the contract. Contract work retentions withheld are classified as financial liabilities and subsequently measured at amortised cost using the effective interest method after initial recognition. 16 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P159330 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 4.6 Borrowing Costs Borrowing costs consist of Finance Charges for Delayed Payments; these are monies payable to a contractor or supplier of goods and services where such contractor or supplier does not receive payment in accordance with contract payment terms, and results in a delay of payments. These are added to the cost of those assets, until the assets are substantially ready for their intended use. 4.7 Provisions Provisions are recognized when the project has a present obligation (legal or constructive) as a result of a past event; the project will probably be required to settle the obligation, and a reliable estimate can be made of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, considering the risk of uncertainties surrounding the obligation. Provisions relate mainly to uncertified contract work as at the reporting date for which the consultant makes an estimate. 5 Critical accounting judgements and key sources of estimation uncertainty The application of accounting policies described in Note 4 requires the use of estimates and assumptions. It also requires the Directors to exercise their judgment in the process of applying the accounting policies. The areas involving a higher degree of judgment or complexity, or where assumptions and estimates are significant to the financial statements have been accounted for accordingly in these financial statements. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods 5.1 Critical judgements in applying accounting policies The following are the critical judgements, apart from those involving estimations (see note 5.2 below), that the Directors have made in the process of applying the project's accounting policies and that have the most significant effect on the amounts recognised in the project's financial statements: (a) Classification between exchange and non-exchange revenue at Note 15; (b) Determining the applicable exchange rate for certified and uncertified contract work in progress denominated in ZMW but payable in USD at predetermined exchange rates; and (c) Determining the exchange rates to apply to the ZMW and USD components, respectively, of the contract work in progress for purposes of dual financial reporting in ZMW and US Dollars (See Note 4.4). 17 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P159330 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 5.2 Key sources of estimation uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year: (i) Measurement of uncertified contract work at; and (ii) Measurement of contingent liabilities. 6. Cash and Bank Yearended Yearended Yearended Yearended 31 December 31 December 31 December 31 December 2021 2021 2020 2020 ZMW US$ ZMW US$ Bank of Zambia - Designated A/c US$ 3,124,356 187,987 137,457,559 6,502,250 Indo Zambia Bank - Operational A/c ZMW 51,744,675 3,113,399 36,472,690 1,733,299 Indo Zambia Bank - Operational A/c US $ 4,054,744 243,967 54,527,632 2,571,352 Total 58,923,775 3,545,353 228,457,881 10,806,901 7. Advances to Contractors and Consultants Advances to Contractors 23,377,508 1,406,589 56,964,349 3,435,926 18 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT (IRCP) INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P-159330 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 8. CWIP- Road Works Construction Yearended Yearended Yearended Yearended 31 December 31 December 31 December 31 December 2021 2021 2020 2020 ZMW US$ ZMW US$ CWIP Rehabilitation 396,130,133 24,529,176 92,440,604 6,051,026 CWIP Upgrading 35,554,156 2,201,585 17,235,370 1,128,202 CWIP New Construction 4,914,908 304,341 4,649,371 304,341 CWIP Periodic Maintenance 1,730,418 107,151 1,636,930 107,151 Supervision and Consultancy 781,919 48,418 - - Feasibilty Studies and Designs 48,160,465 2,982,193 45,558,509 2,982,193 487,271,999 30,172,864 161,520,784 10,572,913 9. Project Costs Yearended Yearended Yearended Yearended 31 December 31 December 31 December 31 December 2021 2021 2020 2020 ZMW US$ ZMW US$ Office Expenses 16,691,580 1,031,431 7,800,428 483,502 Motor Vehicle Expenses 33,318,352 2,058,857 23,593,300 1,462,407 Building Repairs 1,767,910 109,245 1,202,634 74,544 Staff Costs 18,863,241 1,165,625 8,422,401 522,054 Workshops & Training 27,968,278 1,728,257 22,075,522 1,368,329 Road Inspections 10,615,826 655,989 7,221,272 447,603 Exchange (Gains)/Losses (43,093,728) (2,662,911) 606,519 37,594 Taxes 5,594,664 345,714 - - Audit Fees 209,990 12,976 108,249 6,710 Professional & Legal Fees 15,133,843 935,173 6,837,365 423,807 Bank Charges 195,769 12,097 242,282 15,018 87,265,725 5,392,453 78,109,972 4,841,568 19 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT (IRCP) INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P-159330 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 10a. Property, Plant & Equipment - ZMW Land & Plant & Motor Office Furniture & Total Buildings Equipment Vehicles Equipment fittings ZMW ZMW ZMW ZMW ZMW ZMW Cost At 1 January 2020 679,311 6,233,283 16,350,486 1,290,452 588,628 25,142,160 Additions -. 6,308,760. 2,599,972 2,224,894 650,371 11,783,997 At 31 December 2020 679,311 12,542,043 18,950,458 3,515,346 1,238,999 36,926,157 Cost At 1 January 2021 679,311 12,542,04318,950,458 3,515,346 1,238,999 36,926,157 Additions - 1,029,122 1,708,793 1,206,538 384,667 4,329,120 At 31 December 2021 679,311 13,571,16520,659,251 4,721,884 1,623,666 41,255,277 Depreciation At 1 January 2020 144,585 1,306,393 4,950,302 558,007 299,458 7,258,745 Depreciation Charge 208,293 1,882,033 7,131,569 1,003,883 231,410 10,457,188 At 31 December 2020 352,878 3,188,426 12,081,871 1,561,890 530,868 17,715,933 At 1 January 2021 352,878 3,188,426 12,081,871 1,561,890 530,868 17,715,933 Depreciation Charge 238,313 4,181,078 7,965,875 2,580,209 487,503 15,452,978 At 31 December 2021 591,191 7,369,504 20,047,746 4,142,099 1,018,371 33,168,911 Net Book value At 31 December 2020 326,433 9,353,617 6,868,587 1,953,456 708,131 19,210,224 At 31 December 2021 88,120 6,201,661 611,505# 579,785 605,295; 8,086,366 20 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT (IRCP) INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P-1 59330 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 1Ob. Property, Plant & Equipment - US$ Land & Plant & Motor Office Furniture & Buildings Equipment Vehicle Equipment Fittings Total US$ US$ US$ US$ US$ US$ Cost At 1 January 2020 71,695 457,735 1,588,769 119,296 58,871 2,296,366 Additions - 298,427 122,987 105,245 30,765 557,425 At 31 December 2020 71,695 756,162 1,711,756 224,541 89,636 2,853,790 Cost At 1 January 2021 71,695 756,162 1,711,757 224,541 89,636 2,853,791 Additions 61,921 102,815 72,596 18,195 255,527 At 31 December 2021 71,695 818,083 1,814,572 297,137 107,831 3,109,318 Depreciation At 1 January 2020 13,801 93,546 394,575 45,498 24,046 571,466 Depreciation Charge 14,339 57,763 379,799 27,378 15,381 494.660 At 31 December 2020 28,140 151,309 774,374 72,876 39,427 1,066,126 At 1 January 2021 28,140 151,309 774,374 72,876 39,427 1,066,126 Depreciation Charge 14,339 251,569 479,295 155,248 23,061 923,512 At 31 December 2021 42,479 402,878 1,253,669 228,124 62,488 1,989,638 Net Book value At 31 December 2020 43,555 604,853 937,383 151,665 50,120 1,787,664 At 31 December 2021 29,216 415,206 560,903 69,013 45,342 1,119,680 21 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT (IRCP) INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P-159330 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 11. Road Works and Services Liabilities Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2021 2021 2020 2020 ZMW US$ ZMW US$ Mark Daniels 56,541 3,402 63,208 2,990 National Pension Scheme Authority 19,462 1,171 1,101,813 52,120 Zambia Revenue Authority 6,510,332 391,716 ZEMA 67 4 1,871,497 88,529 6,586,402 396,293 3,036,518 143,639 12. Provisions There were no provisions made as all other works were uncertified at 31st December 2021 and 2020, respectively. 13. Non-exchange transfers-World bank -Capital Grant Yearended Yearended Yearended Yearended 31 December 31 December 31 December 31 December 2021 2021 2020 2020 ZMW US$ ZMW US$ IRCP Grant Balance B/f 541,226,692 30,501,418 319,897,640 19,722,419 Receipts during the year 117,112,279 10,739,228 221,329,052 10,778,999 Total 658,338,971 41,240,646 541,226,692 30,501,418 22 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT (IRCP) INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P-1 59330 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 14. Information Required by the Financial Reporting Guidelines 14.1 Project Implementation Status Summary as at 31 December 2021 Contract Total Actual Project Amount Disbursed at 31 Costs, December 2021 See Note 8 No. Source See Note 15 Project US $ US $ Millions US $ Millions Status at 31 Millions December 2021 1. IRCP Loan 200.00 41.24 31.02 14.2 Statement of comparison of Budget and Actual Costs Category Budgeted Actual Comments No. Category of Amounts Costs Expenditure US$ at Balance Millions 31 US$ December, 2021 US$ Millions 1. Component 1 Improved of Works on Feeder Roads 180.00 26.18 153.82 going 2. omponent Institutional 2 Strengthening 20.00 12.34 7.66 On going 3. Total 200.00 3. 1.38 23 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT (IRCP) INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P-159330 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 14.3 Bank Reconciliation Statement Bank of Zambia Designated Account No. Address: Kafue House, Lusaka, Zambia Date US$ Initial deposit 3,000,000 Front End Fee 15th April,2018 500,000 Project Preparatory Charge 15th April,2018 15,000 Reimbursement 121h April,2018 492,080 Disbursement 1 1th June,2018 10,715,339 Disbursement 12th June 2018 5,000,000 Disbursement 18fh November 2020 5,000,000 Disbursement 23rd March 2020 5,672,205 Direct Payment 1st December 2020 106,794 Direct payment 1st January 2021 53,290 Disbursement 101h May 2021 10,685,938 41,240,646 Deduct Payments (38,018,452) Total Service Charges (500,000) (38,518,452) 2,722,194 Bank Interest 41,101 Exchange Difference 782,058 Ending balances as at 31st December 2021 3,545,353 Bank of Zambia - Designated Account US $ 187,987 Indo Zambia Bank - Operational Account ZMW 3,113,399 Indo Zambia Bank - Operational Account US $ 243,967 3,545,353 Less: Unpresented Cheques (1,500) Balance per cash books as at 31 December 2021 3,543,853 24 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT (IRCP) INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P-159330 APPENDICES TO THE TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 14.4Bank Reconciliation of world Bank Funding US$ Total Disbursements as at 31 December 2021 per World Bank 41,240,646 Total IRCP Grant funding received per Project accounts 41,240,646 Difference - 25 NATIONAL ROAD FUND AGENCY IMPROVED RURAL CONNECTIVITY PROJECT (IRCP) INTERNATIONAL DEVELOPMENT ASSOCIATION DEVELOPMENT CREDIT AGREEMENT P-1 59330 APPENDICES TO THE TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Statement of Sources and Application of Funds Appendix I Year ended Year ended Cumulative to 31 Dec 2020 31 Dec 2021 31 Dec 2021 US$ US$ US$ Sources of Funds Trust Fund Replenishment 10,672,204 10,685,937 40,073,480 Direct Disbursements 106,794 53,290 675,085 Reimbursements - - 492,080 Other Income 3,544 14,350 41,101 Total Income 10,782,542 10,753,577 41,281,746 Application Improvement of Feeders Roads 6,310,009 16,883,022 26,339,485 Institution Strengthening - Coordination and Implementation Support 1,250,677 1,000,191 7,122,597 -Strategic Institution Enhancement 1,076,616 926,013 4,541,371 Front End Fee - 515,000 Exchange Difference 205,515 (792,102) (780,060) Total 8,842,817 18,017,124 37,738,393 Net inflow of cash 1,939,725 (7,263,548) 3,543,353 Opening Balance 8,867,176 10,806,901 - Closing cash and bank balances 10,806,901 3,543,353 3,543,353 26