Ministry of Public Works Timor-Leste Branch Roads Project IDA Credit Number 6488-TL Annual Project Financial Statements for the Period 12 October to 31 December 2021 and for the Year Ended 31 December 2022 1|P a g e MINISTRY OF PUBLIC WORKS - TIMOR_LESTE BRANCH ROADS PROJECT WORLD BANK LOAN ACCOUNT - IDA CREDIT NO. 6488-TL Funding body: World Bank (WB) Recipient & Employing Authority: The Council for the Administration of the Infrastructure Fund (Democratic Republic of Timor-Leste) Implementing agency: Ministry of Public Works – Project Management Unit Loan numbers: IDA Credit 6488-TL Auditors: Merit Partners TABLE OF CONTENTS Page Statement of Approval 3 Independent Auditor’s Report 4-5 Statement of Cash Receipts and Payments 6 Statement of Outstanding Loan Balances 7 Notes to the Financial Statements 8-12 2|P a g e 3|P a g e Independent auditor’s report to the Ministry of Public Works - Program Management Unit of Timor- Leste Branch Roads Project Report on the Audit of the Financial Report We have audited the accompanying financial report of Timor-Leste Branch Roads Project (“the Project”), which comprises the Statement of Project Cash Receipts and Project Cash Disbursements and the Statement of Outstanding Loan Balances for the period 12 October to 31 December 2021 and for the year ended 31 December 2022, a summary of significant accounting policies, other accompanying notes, and the Ministry of Public Works - Program Management Unit’s (“MPW-PMU”) Statement of Approval. In our opinion, the financial report of Timor-Leste Branch Roads Project presents fairly in all material respects the financial transactions for the period 12 October to 31 December 2021 and for the year ended 31 December 2022, and a. is in accordance with the cash basis of the International Public Sector Accounting Standards (IPSAS) as promulgated by the International Federation of Accountants (IFAC), as further detailed in Note 1(b); b. is in accordance with the requirements under the World Bank (“WB”) administered IDA Credit No. 6488-TL dated 30 December 2013; c. the financial report is prepared in accordance with the basis of accounting as disclosed in Note 1; and d. complies with the World Bank Disbursement Guidelines for Investment Project Financing. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the MPW-PMU in accordance with the independence requirements of the International Federation of Accountants (“IFAC”) Code of Ethics for Professional Accountants. We have also 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. Emphasis of Matter - Basis of Accounting and Restriction of Distribution and Use We draw attention to Note 1(b) to the special purpose financial report, which describes the basis of accounting. The financial report has been prepared to assist MPW-PMU meet the requirements of the World Bank administered IDA Credit No. 6488-TL. As a result, the special purpose financial report may not be suitable for another purpose. Our report is intended solely for Ministry of Public Works - Program Management Unit and World Bank and should not be distributed to parties other than Ministry of Public Works - Program Management Unit and World Bank. A party other than Ministry of Public Works - Program Management Unit or World Bank accessing this report does so at their own risk and we expressly disclaim all liability to a party other than Ministry of Public Works - Program Management Unit and World Bank for any costs, loss, damage, injury or other consequence which may arise directly or indirectly from their use of, or reliance on the report. Our opinion is not modified in respect of these matters. 4|P a g e Responsibilities of Program Management Unit for the Financial Report The Program Management Unit of the Project is responsible for the preparation and fair presentation of the financial report in accordance with the financial reporting requirements under the World Bank (“WB”) administered IDA Credit No. 6488-TL dated 30 December 2019 (“Loan Agreement”), and for such internal control as the Program Management Unit determines is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. The Program Management Unit is responsible for overseeing the Project’s financial reporting process. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report is 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 International Standards on Auditing 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 the financial report. As part of an audit in accordance with the International Standards on Auditing, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial report, 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 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 Project’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 financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. We communicate with management 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. Merit Partners MunLi Chee Director Darwin 28 September 2023 5|P a g e MINISTRY OF PUBLIC WORKS - TIMOR-LESTE BRANCH ROADS PROJECT WORLD BANK LOAN ACCOUNT - IDA CREDIT NO. 6488-TL STATEMENT OF PROJECT CASH RECEIPTS AND PROJECT CASH DISBURSEMENTS FOR THE PERIOD 12 OCTOBER TO 31 OCTOBER 2021 AND FOR THE YEAR ENDED 31 DECEMBER 2022 (Amounts in US Dollar) Cumulative 2021 2022 Total US$ US$ US$ PROJECT CASH RECEIPTS Cash receipts through the following: Designated Account Advances – 200,000 - 200,000 receipts from Loan No. 6488-TL 200,000 - 200,000 PROJECT CASH DISBURSEMENTS Project Management – Salaries & Income Tax 2,229 20,785 23,014 Bank Admin Charges 177 1,024 1,201 Petty Cash Reimbursement for Petty Cash - 4,000 4,000 2,406 25,809 28,215 EXCESS OF CASH RECEIPTS OVER CASH PAYMENTS 197,594 (25,809) 171,785 CASH AT BEGINNING OF PERIOD - 197,594 - CASH AT END OF PERIOD 197,594 171,785 171,785 The Statement Should be Read in Conjunction with the Accompanying Notes. 6|P a g e MINISTRY OF PUBLIC WORKS - TIMOR-LESTE BRANCH ROADS PROJECT WORLD BANK LOAN ACCOUNT - IDA CREDIT NO. 6488-TL STATEMENT OF OUTSTANDING LOAN BALANCES AS AT 31 DECEMBER 2022 AND 2021 (Amounts in US Dollar) OUTSTANDING LOAN BALANCE – IDA Credit No. 6488-TL 2022 2021 US$ US$ Outstanding Loan Balance, at 1 January 200,000 - Disbursements made during period - 200,000 Outstanding Loan Balances, at 31 December 200,000 200,000 The Statement Should be Read in Conjunction with the Accompanying Notes. 7|P a g e MINISTRY OF PUBLIC WORKS - TIMOR-LESTE BRANCH ROADS PROJECT WORLD BANK LOAN ACCOUNT - IDA CREDIT NO. 6488-TL NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD 12 OCTOBER TO 31 OCTOBER 2021 AND FOR THE YEAR ENDED 31 DECEMBER 2022 (Amounts in US Dollar) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Project Description The Government of Timor-Leste, through the Ministry of Public Works (“the Ministry” or “MPW”), has received funding through loans from the International Development Association (“IDA”), administered by the World Bank, towards the cost of the Timor-Leste Branch Roads Project (“the Project”). The objective of the Project is to improve road access, safety, and climate resilience on the Gleno–Maubisse Corridor and, in the event of an Eligible Crisis or Emerge ncy, to provide an immediate response to the Eligible Crisis or Emergency. The Project consists of the following parts: Part 1: Gleno–Maubisse Corridor Upgrading and Road Safety Improvement 1.1 Upgrading to national roads standards, incorporating climate resilient and urban safety considerations; maintenance, and supervision of: a. Letefoho-Hatubuilico Junction Road section (18.5 km) b. Gleno-Letefoho road section (25.8km) (including updating the Gleno-Letefoho engineering design and associated safeguards documents). 1.2 Carrying out road safety improvements on selected national roads other than on the Gleno-Maubisse Corridor Roads. Part 2: Institutional Strengthening and Project Management 2.1 Providing technical assistance to support the recipient’s transport sector development including on: a. network data collection on national and district roads; b. piloting long-term performance-based maintenance contracts; c. MPW supervision, road safety and geotechnical capacity building; and d. MPW and related entities’ staff training and capacity building. 2.2 Assessing the feasibility and design of the second phase of the Gleno-Maubisse Corridor, consisting of: a. the Hatubuilico junction-Hatubuilico town section (5.2km); b. the Humboe junction-Ermera town section (4.8km); and c. other selected road sections, as agreed with the recipient. 2.3 Providing Project implementation support, including yearly audits, and Project monitoring and evaluation. Part 3: Contingent Emergency Response Provision of immediate response to an Eligible Crisis or Emergency, as needed. The Project is being implemented by the Ministry’s Project Management Unit (“MPW-PMU”). 8|P a g e MINISTRY OF PUBLIC WORKS - TIMOR-LESTE BRANCH ROADS PROJECT WORLD BANK LOAN ACCOUNT - IDA CREDIT NO. 6488-TL NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD 12 OCTOBER TO 31 OCTOBER 2021 AND FOR THE YEAR ENDED 31 DECEMBER 2022 (Amounts in US Dollar) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – cont. b. Basis of Accounting The special purpose financial report is for the Ministry of Public Works (“the Ministry or MPW”) project for The Timor- Leste Branch Roads Project (“the Project”), a project established in Timor-Leste through World Bank administered loans. The Project financial report have been prepared in order to meet the requirements of the Project and World Bank loans terms and conditions (see Note 2), which were signed on 30 December 2019. The financial report is for the period 1 January to 31 December 2021 and 1 January to 31 December 2022 and has been prepared under a cash basis accounting in accordance with the International Public Sector Accounting Standards (IPSAS) as promulgated by the International Federation of Accountants (IFAC) and Government of Timor- Leste. On this basis, Project disbursements are recognized when disbursements are paid rather than when incurred. Cash disbursements made by the Government of Timor-Leste in respect of the Project are included in this report (see Note 4). Eligible expenditures incurred but not yet paid are recorded separately from the accounting records and are not recorded in the Statement of Project Cash Receipts and Project Cash Disbursements. The financial report is presented in US dollars, which is the Project’s functional currency. The Project’s expenditures financed by World Bank administered grants are also disclosed in Note 4 of this report. A separate financial report is prepared for these Project expenditures. The following specific accounting policies have been adopted in the preparation of this report. c. Project Expenditures Project expenditures comprise of eligible expenditure incurred to deliver the Project as defined by the loan agreements. Projects disbursements are mainly with the following: i. Contractors and Project Consultants The road building and civil works for Part 1 of the Project for the upgrade of Letefoho-Hatubuilico Junction Road section (18.5 km), Gleno-Letefoho road section (25.8km) (including updating the Gleno-Letefoho engineering design and associated safeguards documents) and road safety improvements on selected national roads other than on the Gleno-Maubisse Corridor Roads ii. Technical Assistance and Emergency Response The provision of technical assistance for Part 2 and emergency response for Part 3 of the Project. d. Payment Protocol Project expenditures are paid using the Designated Account and Direct Payments methods, following the World Bank Disbursement Guidelines for Investment Project Financing (“the WB Guidelines”). The Designated Account method is payment made for eligible expenditures paid through an account maintained by MPW-PMU on behalf of the Project. The Designated Account is replenished in accordance with the World Bank’s guidelines on Designated Account Fund and Statement of Expenditures Procedures. The Direct Payment method is payments made for eligible expenditures through direct transfers of funds from the World Bank to the Project’s contractors or consultants. The direct payment is based on World Bank’s proportionate share of the invoiced amount. 9|P a g e MINISTRY OF PUBLIC WORKS - TIMOR-LESTE BRANCH ROADS PROJECT WORLD BANK LOAN ACCOUNT - IDA CREDIT NO. 6488-TL NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD 12 OCTOBER TO 31 OCTOBER 2021 AND FOR THE YEAR ENDED 31 DECEMBER 2022 (Amounts in US Dollar) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – cont. e. Cash Cash, held in the Designated Account is stated at nominal amounts in United States dollar (US$). f. Taxation There is no charge for income taxation as the Project is not subject to taxation. Withholding tax receipts owed to Timor-Leste Revenue Services are withheld from the Government’s payment made to suppliers of goods and services for the supplier’s full invoice amount at the following rates:  Construction or building activities 2%  Construction consulting services 4%  Payments to non-residents 10% The withholding taxes for the Civil Works have been deducted and covered by the Government’s counterpart fund. Taxes related to the consulting services are charge from the loan as the consulting services are disbursed 100% from the loan. NOTE 2: LOAN AGREEMENT On 30 December 2019, the Government of Timor-Leste, through MPW, signed a financing agreement with International Development Association (“IDA”), administered by the World Bank, towards the cost of the Project. The financing agreement consists of IDA Credit No. 6488-TL with total amount of SDR 42.5 million credit line. As stipulated in the loan agreement, the loans from World Bank will partly or in whole finance the eligible expenditures of the Project whereas the remaining part will be funded through World Bank and by the Government of Timor-Leste. Refer to the table below for funding allocation: IDA Credit No. Government of 6488-TL Timor-Leste Works under Part 1.1 of the Project 80% 20% Works under Part 1.2 of the Project; Goods, non-consulting 100% - services, consultation services, consulting services, Training and Workshops, Operating Costs for Parts 1 and 2 of the Project Emergency expenditures for Part 3 of the Project 100% - 10 | P a g e MINISTRY OF PUBLIC WORKS - TIMOR-LESTE BRANCH ROADS PROJECT WORLD BANK LOAN ACCOUNT - IDA CREDIT NO. 6488-TL NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD 12 OCTOBER TO 31 OCTOBER 2021 AND FOR THE YEAR ENDED 31 DECEMBER 2022 (Amounts in US Dollar) NOTE 2: LOAN AGREEMENT – cont. The terms and conditions of the facility include a series of covenants which the Project must comply with as follows: a. The principal amount of the loan shall be repaid on semiannually commencing 15 March 2030 up to 15 September 2059; b. The interest rates on the withdrawn credit shall be equal to 1% per annum for payment due on 15 March 2030 to and including 15 September 2039; and 2% for payment due on 15 March 2040 to and including 15 September 2059; NOTE 3: DESIGNATED ACCOUNT Pursuant to terms and conditions set out for each of the loan agreements (see Note 2), the Project Expenditures for eligible expenditures were made pursuant to WB Guidelines for Projects. Eligible expenditures are paid through direct payment from World Bank or reimbursement through the Designated Account. The Designated Account is replenished in accordance with the World Bank’s Guidelines on Designated Fund and Statement of Expenditures Procedures. 11 | P a g e