MUNICIPAL DEVELOPMENT FUND OF GEORGIA GRANT NO.TF014912 (SUSTAINABLE WASTEWATER MANAGEMENT PROJECT) Special Purpose Project Financial Statements and Independent Auditor's Report For the Year Ended 31 December 2020 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SUSTAINABLE WASTEWATER MANAGEMENT PROJECT GRANT NO.TF014912 TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS I INDEPENDENT AUDITOR'S REPORT 2-3 SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED December 31, 2020: Summary of sources and uses of funds 4 Statement of financial position 5 Summary of expenditure by activity 6 Statement of expenditure ("SOE") 7 Statement of designated account 8 Notes to the special purpose project financial statements 9-13 1. B A C K G R O U N D ...................9.................. - 9........ ..................--....-.-.....-......... .............. .. - 9 2 . A C C O U N T IN G PO LIC IES ............................................................................................... .. 9 3. D ES IG N AT ED A C C O U NT........................ ......... ........................................ .................. 10 4 . BA S IS O F FU N D ING........... ....................... .1........... ................. ............................ 10 5. M ETHO DS O F W ITH D RAW AL.................................................................... ................. 10 6. STATEM ENT O F EX PEN DITU RE ........................................................... .............. ..... 11 7 . P RE PA Y M E N T S ........................................................................................................... 1 1 8. PRO ECT EXPENDITURE BY FUNDS.........................--..................... ....... ...................... 11 9. RECONCILIATION OF DESINGATED ACCOUNT ..................................CCO....N. ...................... 12 10, COM MITM ENTS AND CONTINGENCIES ................... .............................. .................. ... 12 11. O PERATING ENV IRO NMEVNTIN......................... .... .................................. ..... ............... 12 12. SUBSEQ UENT EVENTS ..............................................................EN1............ .......... 13 MUNICIPAL DEVELOPMENT FUND OF GEORGIA STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 Management of the Sustainable Wastewater Management Project (the "Project") financed under the Grant Agreement No. TF014912 dated 12 July 2013 (the "Agreement), implemented by the Municipal Development Fund of Georgia ("MDF") is responsible for the preparation of the special purpose project financial statements that present the financial position of the Project as at 31 December 2020, and its summary of sources and uses of funds, summary of expenditure by activity, statement of expenditure ("SOE") and statement designated account, in compliance with the basis of accounting described in Note 2 the accompanying special purpose project financial statements. In preparing the special purpose project financial statements, management is responsible for: * Properly selecting and applying accounting policies; * Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and * Providing additional disclosures that enable users to understand the impact of particular transactions, other events and conditions on the Project, financial position and its sources and uses of funds and movements in designated accounts. Management is also responsible for: * Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Project; * Maintaining adequate accounting records that are sufficient to show and explain the Project's transactions and disclose with reasonable accuracy at any time the financial position of the Project; * Maintaining statutory accounting records in compliance with Georgian legislation; * Taking such steps that are reasonably available to them to safeguard the assets of the Project; and * Preventing and detecting fraud and other irregularities. The special purpose project financial statements for the year ended 31 December 2020 were authorised for issue on 30 June 2021 by the Management. On behalf of Management: Levan Sh -vadz Executi or Deputy;elre Chief Financial Off icer 30 June 2021 30 June 2021 1 Deloitte & Touche LLC King David Business Center 12 Merab Aleksidze Street Tbilisi, 0171, Georgia Tel: +995 (32) 224 45 66 Fax: +995 (32) 224 45 69 deloitte.ge INDEPENDENT AUDITOR'S REPORT To the management of the Municipal Development Fund of Georgia: Opinion We have audited the accompanying special purpose project financial statements of the Sustainable Wastewater Management Project (the "Project") financed under the Grant Agreement No. TF014912 dated 12 July 2013 (the "Agreement"), implemented by the Municipal Development Fund of Georgia, which comprise the Project's summary of sources and uses of funds for the year ended 31 December 2020, statement of financial position as at 31 December 2020, summary of expenditure by activity, statement of expenditure ("SOE") and statement of designated account for the year ended 31 December 2020 and a summary of significant accounting policies and other explanatory notes (collectively referred to as the "special purpose project financial statements"). In our opinion, the accompanying special purpose project financial statements for the year ended 31 December 2020 are prepared, in all material respects, in accordance with the Grant Agreement No. TF014912 dated 12 July 2013, as further detailed in Note 2. Basis for Opinion We conducted our audit in accordance with International Standards of Auditing ("ISAs"). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Special Purpose Project Financial Statements section of our report. We are independent of the Fund in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (the "IESBA Code") together with the ethical requirements that are relevant to our audit of the special purpose project financial statements in Georgia, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other matter Data included on pages 4 to 13 of the accompanying special purpose project financial statements that are marked as "Unaudited" have not been audited. Emphasis of Matter Basis of Accounting and Restriction on Distribution and Use We draw attention to Note 2 to the special purpose project financial statements, which describes the basis of accounting. The special purpose project financial statements are prepared to assist the Project's management to comply with the financial reporting provisions of the Agreement. As a result, the special purpose project financial statements may not be suitable for another purpose. This report is intended solely for use by the Project's management in reporting the information to the Government of Georgia and International Bank for Reconstruction and Development. This report is not intended for the benefit of any other third parties and we accept no responsibility or liability to any party other than the Project's management in respect of the report. Should any third party take decisions based on the contents of the report, the responsibility for such decisions shall remain with those third parties. Our opinion is not modified in respect of this matter. Deloitte refers to one or more of Deloitte Touche Tohnmati Limited, a UK private company lmited by guarantee (UTTL, its networ kof member firms, and thei related entities. DTTL and each of its member firms are leg sp,arate and independent enrtities DiL (aeo referred to as "Deloitte Globai) does not provide services to clients. Please see for a more deta led dsC ription of DTTL and its menemier firms. y 2021 Delaitte S Touche LLC AlI rights reserved. 2 Deloitte. Responsibility of Management and Those Charged with Governance for the Special Purpose Project Financial Statements Management is responsible for the preparation of these special purpose project financial statements in accordance with the agreement and basis of accounting as further described in Note 2 and for such internal control as management determines is necessary to enable the preparation of 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 procpss-. Auditor's Responsibilities 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 an audit in accordance with ISAs, we exercise professional judgement and maintain professional skepticism throughout the audit. We also: * Identify and access 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 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 aud t 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. 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 nternal control that we identify during our audit. 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С U е� а 1Л tn lЭ Н fu � й Н � и и л а F и'+� fl._ о а и1 U С7 w I- MUNICIPAL DEVELOPMENT FUND OF GEORGIA SUSTAINABLE WASTEWATER MANAGEMENT PR03ECT GRANT NO.TF014912 STATEMENT OF FINANCIAL POSITION FOR THE YEAR ENDED 31 DECEMBER 2020 (in US Dollars) 31 December 31 December Note 2020 2019 ASSETS IBRD Designated Account 3, 9 745,000 Prepayments 7 107,383 TOTAL ASSETS - - 852,383_ Payables 451,902 906,363 TOTAL LIABILITIES 451,902 906,363 NET LIABILITIES (451,902) (53,980) Funds received: SIDA Grant 10,040,181 8,904,142 Government of Georgia 1,199,780 1,040,S66 Total funds received 11,239,961 9,944,708 Expenditure: Project expenditure 8 11,926,OS3 10,018,530 Total Expenditures 11,926,053 10,018,530 Foreign exchange (gain), net 234,190L (19,842) TOTAL NET ASSETS (451,902) (53,980) No transactions occurred after 31 October 2020 except receipt of funds from Swedish International Development Cooperation Agency and Government of Georgia amount of USD 116,422 and USD 24,214, respectively. On behalf of Management: Gc-rke 6 Levan t;hradze ,of, re, x1MCdtivet9 - f Financial E Deputy rector Chie Officer 30 June 2021 30 June 2021 The notes on pages 9 to 13 form an integral part of these special purpose project flnancia statements 5 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SUSTAINABLE WASTEWATER MANAGEMENT PROJECT GRANT NO.TF014912 SUMMARY OF EXPENDITURE BY ACTIVITY FOR THE YEAR ENDED 31 DECEMBER 2020 (in US Dollars) Actual Planned* Variance Project activities Cumulative Cumulative Cumulative Year ended as at Year ended as at Year ended as at 31.12.2020 31.12.2020 31.12.2020 31.12.2020 31.12.2020 31.12.2020 Unaudited Unaudited Unaudited Unaudited Part I: Technical Assistance B55,838 3,668,293 900,000 3,712,455 44,162 44,162 Part II: Investment Grants 1,051,685 8,257,760 1,600,000 8,806,075 548,315 548,315 TOTAL EXPENDITURES 1,907,523 11,926,053 2,500,000 12,518,530 592,477 592,477 *The initial budgeted figures are updated several times during the year. Planned figures for the year ended 31 December 2020 included in the special purpose project financial statements represent the final budgeted figures reflected in the State Budget for FY2020 adjusted to the accrual model. On behalf of Management: Gedg qShe e'LevanV dze Exedofve Deput etrChief Financial Officer 30 June 2021 30 June 2021 The notes on pages 9 to 13 form an integral part of these special purpose project financial statements. 6 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SUSTAINABLE WASTEWATER MANAGEMENT PROJECT GRANT NO.TF014912 STATEMENT OF EXPENDITURE ("SOE") FOR THE YEAR ENDED 31 DECEMBER 2020 (in US Dollars) Works and goods, consulting services, Withdrawal No. Withdrawal application date Total SOE training WA052 30.10.2020 5,000 5,000 5,000 5,000 On behalf of Management; G shLevanh dzeO Exe orr hief Financial 30 June 2021 30 June 2021 The notes on pages 9 to 13 form an integral part of these special purpose project financial statements. 7 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SUSTAINABLE WASTEWATER MANAGEMENT PROJECT GRANT NO.TF014912 STATEMENT OF DESIGNATED ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2020 (in US Dollars) Account No. 205236743 Depository Bank State Treasury Address 16 V. Gorgasali street Tbilisi, 0114 Georgia Opening Balance Note 745,000 Funds received from IBRD Refund to SIDA from DA (745,000) Present outstanding amount advanced to Designated Account (DA) Designated Account (DA) closing balance as at 31 December 2020 Amount of eligible expenditures paid 9 Total advance accounted for On behalf of Management: Ge Shen ILevan adze/ Exe% 9ve Di I,VV Deputy rector -Chief Financial Officer 30 June 2021 30 June 2021 The notes on pages 9 to 13 form an integral part of these special purpose project financial statements. 8 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SUSTAINABLE WASTEWATER MANAGEMENT PROJECT GRANT NO.TF014912 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (in US Dollars) 1. BACKGROUND Municipal Development Fund of Georgia (the "Fund' or "MDF") was established on 7 June 1997 by the Presidential Decree NO 294 "On management of funds for the development of municipal sector in Georgia". The Fund is a legal entity of public law, the objective of which is to support strengthening institutional and financial capacity of local government units, investing financial resources in local infrastructure and services, improving on sustainable basis the primary economic and social services for the local population and the provision of low-interest loans to legal entities and physical persons of Georgia in the framework of the Government Program. The founder and governing body of the fund is the Government of Georgia. The Fund is cooperating with majority of large investment banks and financial institutions operating in Georgia. The Swedish International Development Cooperation Grant Agreement No.TF014912 (the "Agreement") in the amount of 9,252,155 United States Dollars ("USD") was signed between the Government of Georgia ("GoG") and International Bank for Reconstruction and Development ("IBRD"), acting as administrator of grant funds, on 12 July 2013 ("inception"). Amendment to the agreement was signed on June 24, 2015 based on which the amount of grant was increased to USD 10,052,155. The main objectives of the grant are: the provision of technical assistance to support the recipient in developing adequate policy environment documents for improved wastewater treatment infrastructure; carrying out of on the job training in wastewater operation and maintenance; development of a policy for sludge management, carrying out of stakeholder consultations on wastewater management to promote public participation and improvement of the efficiency of the water and wastewater sector. The closing date of the grant is 15 October 2020 and the application deadline is set at 31 October 2020. 2. ACCOUNTING POLICIES Basis of accounting - These special purpose project financial statements have been prepared in accordance with the provisions of Grant Agreement No, TF014912 dated 12 July 2013 to the extent applicable to these special purposes financial statements and as agreed by the Fund, Government of Georgia and International Bank for Reconstruction and Development. These special purpose project financial statements, in accordance with the provisions of the Agreement, are prepared to report the information to the Government of Georgia and International Bank for Reconstruction and Development. As a result these special purpose project financial statements may not be suitable for another purpose. Sources of funds - Project financing is recognised as sources of funds in the period when the cash inflow can be reasonably estimated and they become available and measurable. The accumulated project financing is disclosed under "Funds" in the statement of financial position. In addition current year funds received is disclosed in the Statement of Sources and Uses of Funds, showing under sources funds and expenditures respectively. Expenditure - is recognised on an accruals basis as a use of project funds when liabilities are incurred. The accumulated project expenditures is disclosed under "Expenditures" in the statement of financial position. Functional currency - The functional currency of the project and its presentational currency is United States Dollars ("US Dollar" or "USD"). 9 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SUSTAINABLE WASTEWATER MANAGEMENT PROJECT GRANT NO.TF014912 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (CONTINUED) (in US Dollars) Transactions in other currencies - Transactions in currencies other than the reporting currency are converted to US Dollars at the exchange rate prevailing at the date of the transaction. Monetary items are translated into US Dollars at the National Bank of Georgia (NBG) official exchange rate at the reporting date. Prepayments - Prepayments represent the amounts paid to the contractors for work. Cash - Cash comprises balances with State Treasury. 3. DESIGNATED ACCOUNT Designated account is a special disbursement account of the Project maintained in US Dollars at the State Treasury to ensure the payment of eligible expenditures, within defined limits, which do not require individual authorisation from IBRD in accordance with the Agreement. 4. BASIS OF FUNDING According to the terms of the Agreement, the expenditure is co-financed by proceeds received from IBRD and the Government of Georgia (GoG). IBRD finances 100% of the expenditures with GoG financing all taxes and duties imposed on the territory of Georgia. IBRD GoG Total Works and goods, consultants' services and training 10,052,155 1,809,388 11,861,543 Total: 10,052,155 1,809,388 11,861,543 5. METHODS OF WITHDRAWAL The methods of withdrawal used from the inception of the grant to 31 December 2020 were as follows: (a) Designated Account Municipal Development Fund withdraws the eligible amounts from the designated account and prepares and sends replenishment requests to International Bank for Reconstruction and Development with authorised signatures. The replenishment requests and respective documentation are reviewed by the World Bank and an approved amount is transferred to the designated account. (b) Direct Payment Available amounts are drawn from time to time within limits determined under the grant agreement for direct payments of eligible expenditures for sub-projects. Direct payments are made by International Bank for Reconstruction and Development directly to third parties. MDF forms withdrawal applications for request of direct payments and sends it to the IBRD, for settlement. (c) GoG Current Account The Project maintains a separate account where funds from the Government of Georgia are accumulated. The funds are further disbursed to sub-contractors based on the share of expenditures to be incurred. 10 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SUSTAINABLE WASTEWATER MANAGEMENT PROJECT GRANT NO.TF014912 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (CONTINUED) (in US Dollars) 6. STATEMENT OF EXPENDITURE Withdrawals are to be made on the basis of SOEs for expenses on contracts valued at less than USD 400,000. 7. PREPAYMENTS 31 December 31 December 2020 2019 Advances to contractors 107,383 Total: - 107,383 Payments of advances to contractors are made at the beginning of the contract in amount of 10%-20% of total contract amount. Recovery of advance is done periodically upon submission of works completed certificates by contractors. 8. PROJECT EXPENDITURE BY FUNDS Actual Year to Cumulative to Project activities date date Part 1: Technical assistance 725,286 3,110,832 Part 2: Investment grants 876,195 7,381,802 IBRD TOTAL 1,601,481 10,492,634 Part 1: Technical assistance 130,552 557,461 Part 2: Investment grants 175,490 875,958 GoG TOTAL 306,042 1,433,419 TOTAL PROJECT EXPENDITURE 1,907,523 11,926,053 The Project consists of the following main components: Part 1 - Technical assistance * Provision of technical assistance to support the recipient in developing adequate policy environment documents for improved wastewater treatment infrastructure; * Carrying out of on-the-job training in wastewater operation and maintenance; and * Developing of a policy for sludge management, including final disposal Part 2 - Investment grants * Improvement of the efficiency of the water and wastewater sector through: (a) the rehabilitation of approximately two to three wastewater treatment plants; and (b) the provision of Investment Subproject Grants to support the implementation of Investment Subprojects. 11 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SUSTAINABLE WASTEWATER MANAGEMENT PROJECT GRANT NO.TF014912 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (CONTINUED) (in US Dollars) 9. RECONCILIATION OF DESINGATED ACCOUNT IBRD GoG Total Expenditures incurred during the year 1,601,481 306,042 1,907,523 Direct payment (1,881,039) - (1,881,039) Change in prepayments (107,383) - (107,383) Change in payables 581,511 (127,050) 454,461 Foreign exchange (194,570) (39,620) (234,190) Amount of eligible expenditure paid - 139,372 139,372 10. COMMITMENTS AND CONTINGENCIES Management is not aware of any commitments and contingencies, which would have a material impact on the financial position of the Project and the special purpose project financial statements as at 31 December 2020 and on the funds received and disbursed during the year then ended. The payables as at 31 December 2020 represents payable to Consortium SADE & VWS Romania and SAFEGE SAS amount of USD 423,642 and USD 28,260, respectively. Rehabilitation of Tskaltubo and Telavi Wastewater Treatment Plant ("WWTP") were completed with a snag - list, the completion certificates were issued on October 14, 2020. The correction of the identified defects and remaining works are liability of the SADE & VWS Romania, accordingly the amount payable to the contactor will be settled from the state budget of the Government of Georgia. Subsequent to the reporting period, payable to SAFEGE SAS was settled from the state budget of the Government of Georgia. No provision has been made in these special purpose project financial statements as the payables are already accrued and management believes that no additional payables will occur in future due to services provided by Consortium SADE & VWS Romania, it should fix provided works till November 2021. 11. OPERATING ENVIRONMENT Emerging markets such as Georgia are subject to different risks than more developed markets, including economic, political and social, and legal and legislative risks. Laws and regulations affecting businesses in Georgia continue to change rapidly and tax and regulatory frameworks are subject to varying interpretations. The future economic direction of Georgia is heavily influenced by the fiscal and monetary policies adopted by the government, together with developments in the legal, regulatory, and political environment. For the last two years Georgia has experienced a number of legislative changes, which have been largely related to the European Union Association Agreement. Whilst the legislative changes implemented during 2019 and 2020 paved the way, more can be expected as Georgia's action plan for achieving accession to the European Union continues to develop. The economic impact caused by the coronavirus and the expectations of the future development of pandemic and its impact on the Georgian economy have been reflecting on increased volatility of the foreign exchange market during the recent days. Despite the current multiple uncertainties, the National Bank continues working intensively in order to minimize the negative impact on the citizens and companies. Georgia declared a state of emergency on 21 March 2020 in response to the continuing spread of the COVID-19 outbreak. Initially state of emergency was announced until 21 April 2020 but then it was extended to 21 May 2020. All public transportation (both between and within municipalities) was suspended. The government also put restrictions on the private car use from 17 April 2020 to 26 April 2020. All types of public transport were restored from 29 May 2020. 12 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SUSTAINABLE WASTEWATER MANAGEMENT PROJECT GRANT NO.TF014912 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (CONTINUED) (in US Dollars) The second wave of Covid-19 started to emerge in Georgia from September 2020. Georgian Government once again introduced numerous limitations to businesses and to society in general. On 26 November 2020, the prime minister of Georgia made an announcement around the second lockdown and forthcoming restriction to be imposed from 28 November 2020 to 31 January 2021. The limitations were of significantly lighter character than those in spring. As the project has reached its closing date, there are no further considerations to be made in terms of future uncertainty caused by the pandemic or any other related events thereto. 12. SUBSEQUENT EVENTS Rehabilitation of Tskaltubo and Telavi Wastewater Treatment Plant ("WWTP") were completed with a snag - list, the completion certificates were issued on October 14, 2020. For successful completion of the schemes the Supervision Consultant ("SC") services was required beyond the project closing day, during commissioning to ensure proper "operational acceptance" and confirmation of the guarantee tests. SC activities that extend beyond the project closing date is financed from Word Bank funded Second Regional and Municipal Infrastructure Development Project Additional Financing ("SRMIDP AF"). Contract was signed on March 29, 2021 - The tentative duration of this assignment is 15 months (3 months up to the acceptance certificate and 12 months Defect Liability Period ("DLP")). 13