TRANSPORT REFORM AND REHABILITATION CENTER CREDIT NO.5108-GE (THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT ADDITIONAL FINANCING) Special Purpose Project Financial Statements For the period from 1 January 2016 to 31 October 2016 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT ADDITIONAL FINANCING CREDIT NO.5108-GE TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS I INDEPENDENT AUDITORS' REPORT 2-3 SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 OCTOBER 2016 Statement of Sources and Uses of Funds 4 Balance Sheet Statement Statement of Expenditure Withdrawal Schedule 6 Designated Account Statement Notes to the Special Purpose Project Financial Statements 8-12 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT ADDITIONAL FINANCING CREDIT NO.5108-GE STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 OCTOBER 2016 Management of the Third East-West Highway Improvement Project Additional Financing (the "Project") implemented by the Transport Reform and Rehabilitation Center (The "Center") is responsible for the preparation of the special purpose project financial statements that present fairly the financial position of the Project as at 31 October 2016, and its sources and uses of funds and movement in designated account for the period from 1 January 2016 to 31 October 2016, in compliance with the Cash Basis International Public Sector Accounting Standard, Financial Reporting under the Cash Basis of Accounting ("IPSAS - Cash Basis), and in conformity with the World Bank's Financial Management Sector Board's "Guidelines: Annual Financial Reporting and Auditing for World Bank Financed Activities" (the "World Bank Guidelines"). In preparing the 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; * Providing additional disclosures when compliance with the specific requirements in IPSAS - Cash Basis are insufficient to 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; * Making an assessment of the Projects ability to continue as a going concern. 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, and which enable them to ensure that the special purpose project financial statements of the Project comply with the Guidelines on Annual Financial Reporting and Auditing for World Bank - Financed Activities issued by the World Bank's Financial Management Sector Board; * 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 period from 1 January to 31 October 2016 were authorized for issue on 28 December 2016 by the Management. On behalf of Management: I All Giorgi Tsagareli Marina Maja a e Director Financial anager 28 December 2016 28 December 2016 KPMG Georgia LLC 2nd Floor, Besiki Business Centre 4, Besiki Street 0108 Tbilisi, Georgia Telephone +995 322 93 5713 Fax +995 322 98 2276 Internet www.kpmg.ge Independent Auditors' Report To the management of Transport Reform and Rehabilitation Center We have audited the accompanying special purpose project financial statements of the Additional Financing for the Third East-West Highway Improvement Project Additional Financing (the "Project"), financed under the International Development Association (the I "IDA"), Credit Agreement No. 5108-GE dated 28 June 2012, implemented by the Transport Reform and Rehabilitation Center (the "Center"), which comprise the Statement of Balance Sheet as at 31 October 2016 and the Statements of Sources and Uses of Funds, Statement of Expenditures Withdrawal Schedule ("SOEs") and I Designated Account Statement for the period from 1 January 2016 to 31 October 2016 and notes, comprising a summary of significant accounting policies and other explanatory information. The special purpose project financial statements have been I prepared by management in accordance with the International Public Sector Accounting Standard: Financial Reporting Under the Cash Basis of Accounting and in conformity with the World Bank's Financial Management Sector Board's "Guidelines: Annual Financial Reporting and Auditing for World Bank-Financed Activities" (the "World Bank Guidelines") as described in Note 2 to the special purpose project financial statements. Management's Responsibility for the Special Purpose Project Financial Statements Management is responsible for the preparation and fair presentation of these special purpose project financial statements in accordance with the International Public Sector Accounting Standard: Financial Reporting Under the Cash Basis of Accounting and the World Bank Guidelines, for determining the acceptability of the basis of accounting, 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. Auditors' Responsibility Our responsibility is to express an opinion on these special purpose project financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the special purpose project financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the special purpose project financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the special purpose project financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation of the special purpose project financial statements 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 entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the special purpose project financial statements. KPMG Georgia LLC, a company incorporated under the Laws of Georgia, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ('KPMG International), a SwIss entity. Transport Reform and Rehabilitation Center Independent Auditors' Report We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. I Opinion In our opinion, the special purpose project financial statements for the period from 1 January 2016 to 31 October 2016 present fairly, in all material respects, the financial position of the Project as at 31 October 2016, and its sources and uses of funds for the period from 1 January 2016 to 31 October 2016 in accordance with the International Public Sector Accounting Standard: Financial Reporting Under the Cash Basis of Accounting and the World Bank Guidelines. Other Matter Data included on pages 4 to 12 of the accompanying special purpose project financial statements that are marked as "Unaudited" have not been audited. Basis of Accounting and Restriction on Use and Distribution Without modifying our opinion, 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 Center to comply with the requirements of IDA and for providing information to the Government of Georgia and IDA to assist them in evaluating the Project implementation. As a result, the special purpose project financial statements may not be suitable for another purpose. Our report is intended solely for the management of the Center, the Government of Georgia and IDA and should not be used by, or distributed to, other parties. KPMG Georgia LLC //4 - ( o 28 December 2016 3 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT ADDITIONAL FINANCING CREDIT NO. 5108-GE STATEMENT OF SOURCES AND USES OF FUNDS FOR THE PERIOD FROM 1 JANURAY 2016 TO 31 OCTOBER 2016 (in US Dollars) Actual Planned Variance Yearto Cumulative Yearto Cumulative to Yearto 'umulative to date to date date date date date Unaudited Unaudited Unaudited Unaudited FUNDS RECEIVED BY SOURCES International Development Association (IDA) funds: Replenishments 3,883,937 Direct payment 171,502 Returned back of unused (4,760,843) credit Total funds (returned (705,404) 35,501,654 back)/received Government of Georgia 1,319,748 12,353,448 ("GoG") co-financing TOTAL FUNDS RECEIVED 614,344 47,855,102 Foreign exchange difference (11) (41) LESS: EXPENDITURES Component 1 - Construction 3,169,926 30,070,257 3,169,926 30,070,257 of Sveneti-Ruisi section Component 2 - Roads Safety 1,004,520 5,199,468 1,004,520 5,199,468 Component 3 - Project 27,190 231,929 27,190 231,929 Management IDA TOTAL 4,201,636 35,501,654 4,201,636 35,501,654 - Component 1 - Construction 1,055,118 10,964,621 1,055,118 10,964,621 - of Sveneti-Ruisi section Component 2 - Roads Safety 251,232 1,303,792 251,232 1,303,792 - Component 3 - Project 13,387 84,994 13,387 84,994 Management GoG TOTAL 1,319,737 12,353,407 1,319,737 12,353,407 - TOTAL PROJECT 5,521,373 47,855,061 5,521,373 47,855,061 EXPENDITURES NET OUTFLOW OF FUNDS (4,907,040) - The special purpose project financial statements were approved by the management of Transport Reform and Rehabilitation Center on 28 December 2016 and were signed on its behalf by: Giorgi Tsagareli Marina Majagal Director Financial Man er 28 December 2016 28 December 2016 The notes on pages 8 to 12 form an integral part of these special purpose project financial statements. 4 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT ADDITIONAL FINANCING CREDIT NO. 5108-GE BALANCE SHEET STATEMENT AS OF 31 OCTOBER 2016 (in US Dollars) 31 October 2018 ASSETS IDA Designated Account TOTAL ASSETS Funds received: Funds received from IDA 35,501,654 Funds received from GoG 12,353,448 Total funds received 47,855,102 Project expenditures: Financed by IDA (35,501,654) Financed by GoG (12,353,407) Total project expenditures (47,855,061) Foreign exchange difference (41) TOTAL PROJECT EXPENDITURES AND OTHER FUNDS The special purpose project financial statements were approved by the management of Transport Reform and Rehabilitation Center on 28 December 2016 and were signed on its behalf by: Giorgi Tsagareli U Marina Majag Director Financial MM ager 28 December 2016 28 December 2016 The notes on pages 8 to 12 form an integral part of these special purpose project financial statements. 5 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT ADDITIONAL FINANCING CREDIT NO. 5108-GE STATEMENT OF EXPENDITURE WITHDRAWAL SCHEDULE FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 OCTOBER 2016 (in US Dollars) Withdrawal Withdrawal Total SOE Total SOE Total SOE Attributable Attributable Attributable No. application in attributable attributable to to 2016 - to 2016 - to 2016 - date withdrawal to 2015 2016 Component Component Component schedule 1 2 3 12 16 Mar 2016 53,861 45,443 8,418 - - 8,418 13 17 May 2016 30,228 30,228 20,643 9,585 14 29 Aug 2016 76,225 76,225 67,038 9,187 15 10 Oct 2016 - - - 16 22 Oct 2016 - - - - - 160,314 45,443 114,871 - 87,681 27,190 The special purpose project financial statements were approved by the management of Transport Reform and Rehabilitation Center on 28 December 2016 and were signed on its behalf by: Giorgi Tsagareli (q/Marina Maljayle Director Financial Manager 28 December 2016 28 December 2016 The notes on pages 81 to 12 form an integral part of these special purpose project financial statements. 6 TRANSPORT REFORM AND REHABILITATION CENTER THIRDT EAST-WEST HIGHWAY IMPROVEMENT PROJECT ADDITIONAL FINANCING CREDIT NO. 5108-GE DESIGNATED ACCOUNT STATEMENT FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 OCTOBER 2016 (in US Dollars) Account No. 202250928 Depository Bank State Treasury Address 16 V. Gorgasali street Tbilisi, 0114 Georgia Balance as at 1 January 2016 4,907,040 ADD Funds received from IDA: Replenishment 3,883,937 Direct Payment 171,502 Returned back of unused credit (4,760,843) DEDUCT Funds used for the Project expenditures (4,201,636) Balance as at 31 October 2016 The special purpose project financial statements were approved by the management of Transport Reform and Rehabilitation Center on 28 December 2016 and were signed on its behalf by: Giorgi Tsagareli Marina MajkYadle Director Financial Manager 28 December 2016 28 December 2016 The notes on pages 8 to 12 form an integral part of these special purpose project financial statements. 7 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT ADDITIONAL FINANCING CREDIT NO. 5108-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 OCTOBER 2016 (in US Dollars) 1. BACKGROUND The Investment Center for Euro-Asian Transport Corridor was established in 1995 as a non- entrepreneurial and non-profit legal entity under the laws of Georgia in accordance with the Georgian Presidential Decree N 119 dated 16 April 1995. The founder of the Investment Center for Euro-Asian Transport Corridor is Georgia represented by the Georgian Government. A project unit named "Transport Reform and Rehabilitation Center" (the "Center") was formed within the Eurasian Transport Corridor Investment Center. The Center's principal activity is to manage allocated credits/loans received from the International Development Association ("IDA"), the International Bank for Reconstruction and Development ("IBRD"), the Asian Development Bank (ADB) and the European Investment Bank (EIB) and monitor the implementation of transport sector projects. The Center implements the Third East-West Highway Additional Financing Improvement Project (the "Project"), financed under the International Development Association ("IDA"). Credit Agreement No. 5108-GE (the "Agreement") in the amount of 27.7 million Special Drawing Rights ("SDR") was signed between the Government of Georgia ("GoG") and IDA on 28 June 2012. The main objectives of the Project are: to contribute to the gradual reduction of road transport costs and improve access, ease of transit and road safety along central part of the East-West Corridor of Georgia and strengthen the capacity of the Road Department in the Ministry of Regional development and Infrastructure of Georgia (RDMRDI) and relevant government entities to plan and manage the road network and to improve road safety. Official termination date of the Agreement was 30 June 2016, with 4 months of grace period ended on 31 October 2016, however, the Project is still in progress and will be financed from GOG finance. 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES Statement of compliance - These special purpose project financial statements have been prepared in accordance with the Cash Basis International Public Sector Accounting Standard, Financial Reporting under a Cash Basis of Accounting and in conformity with the World Bank's Financial Management Sector Board's "Guidelines: Annual Financial Reporting and Auditing for World Bank- Financed Activities" (the "World Bank Guidelines"). The purpose of these special purpose project financial statements is to provide information to the Government of Georgia and the International Development Association to assist them in evaluating the Project implementation. Cash basis of accounting - Project financing is recognized as a source of project funds when the cash is received. Project expenditures are recognized as a use of the Project funds on cash basis when the payments are made. Presentation currency - The national currency of Georgia is the Georgian Lari ("GEL"). These special purpose project financial statements are presented in United States Dollars ("US Dollar" or "USD"), since management believes that, this currency is more meaningful for the users of the special purpose project financial statements. All financial information presented in USD has been rounded to the nearest USD unless otherwise stated. Transactions in other currencies - Transactions in currencies other than reporting currencies are converted to US Dollars at the exchange rate prevailing at the date of the transaction. Cash - Cash represents the balances with State Treasury of Georgia. 8 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT ADDITIONAL FINANCING CREDIT NO. 5108-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 OCTOBER 2016 (in US Dollars) 3. DESIGNATED ACCOUNT Designated Account is a designated 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 authorization from IDA in accordance with the Agreement. 4. BASIS OF FUNDING According to the terms of the Agreement, the expenditures of all works, goods and consultant services contracts, including all applicable taxes are co-financed by proceeds received from IDA and GoG at a proportional rate of 80% and 20%, respectively. The land acquisition and associated resettlement costs are funded entirely by the GoG. 5. METHODS OF WITHDRAWAL The methods of withdrawal used from the inception of the credit to 31 October 2016 were as follows: (a) Designated Account The Center withdraws the eligible amounts from the Designated Account, prepares, and sends replenishment requests to the World Bank with authorized 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 credit agreement for direct payments of eligible expenditures for sub-projects, Direct payments are made by the World Bank directly to third parties. The Center forms withdrawal applications for request of direct payments and sends it to the World Bank, for settlement. (c) GoG Current Account The Project maintains a separate account where funds from the GOG are accumulated. The funds are further disbursed to sub-contractors based on the share of expenditures to be incurred. The Project has a common GEL account and special organization code for their funds in the State Treasury of Georgia. 6. STATEMENT OF EXPENDITURES (SOE) Withdrawals are to be made on the basis of SOEs for expenses on contracts within the following contractual limits: (i) All expenditures for works valued at less than USD 2,000,000; (ii) Consultant services contracts (firms) valued at less than USD 100,000; (iii) Consultant services contracts (individuals) valued at less than USD 50,000; (iv) All expenditures for goods and non-consulting services valued at less than USD 300,000. I I TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT ADDITIONAL FINANCING CREDIT NO. 5108-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 OCTOBER 2016 (in US Dollars) 7. RECONCILIATION OF AMOUNTS SHOWN AS RECEIVED FROM THE IDA TO ACTUAL EXPENDITURES OF THE PROJECT Period from 1 January 2016 to 31 October 2016 Application of Withdrawals Schedule Expenses incurred in 10 months as per the Applications of Withdrawals Schedule 4,201,636 Expenses incurred in 10 months without Applications of Withdrawals Schedule - 4,201,636 IDA funds received during 10 months: Replenishment 3,883,937 Direct Payment 171,502 Returned back of unused credit (4,760,843) (705,404) Add: Opening Balance as of 1 January 2016 Designated Account 4,907,040 1es 4,907,040 Less: Closing Balance as at 31 October 2016 Designated Account TOTAL EXPENDITURES INCURRED FOR THE PERIOD 4,201,636 FROM 1 JANURAY 2016 TO 31 OCTOBER 2016 10 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT ADDITIONAL FINANCING CREDIT NO. 5108-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 OCTOBER 2016 (in US Dollars) 8. PROJECT EXPENDITURES BY COMPONENTS Actual Planned Variance Project activities Year to Cumulative Year to Cumulative to Year to Cumulative date to date date date date to date Component IUnaudited Unaudited Unaudited Unaudited Construction of Sveneti-Ruisi section Civil works 3,737,671 37,367,643 3,737,671 37,367,643 - Land acquisition and Resettlements 263,579 3,443,441 263,579 3,443,441 Consultancy 223,794 223,794 223,794 223,794 COMPONENT 1 4,225,044 41,034,878 4,225,044 41,034,878 Component 2 - Roads Safety Consultancy 1,226,453 6,342,954 1,226,453 6,342,954 - Vehicles, office equipment and - 131,007 - 131,007 - computers for RDMRDI Trainings 29,299 29,299 29,299 29,299 TOTAL COMPONENT 2 1,255,752 6,503,260 1,255,752 6,503,260 Component 3 - Project Management The Center's fees and operating 40,577 110,636 40,577 110,636 - costs Financial audit - 52,569 - 52,569 RDDMRDI Consultants - 153,718 - 153,718 TOTAL COMPONENT 3 40,577 316,923 40,577 316,923 - TOTAL PROJECT 5,521,373 47,855,061 5,521,373 47,855,061 - EXPENDITURES The Project consists of the following main components: * Component 1 - Upgrading the existing E60 East-West Highway form Sveneti to Ruisi to a dual carriageway road; * Component 2 - Institutional strengthening; * Component 3 - Institutional support to the Road Department in the Ministry of Regional Development and Infrastructure (RDMRDI) of Georgia and the Center related to the Project implementation, audits and the Project monitoring and evaluation. 11 I TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT ADDITIONAL FINANCING CREDIT NO. 5108-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JANUARY 2016 TO 31 OCTOBER 2016 (in US Dollars) The categories of expenditures incurred are presented in line with the categories specified in the Agreement. Each component of the Project expenses is further divided into four types of expenses for The SOE purposes: civil works, goods, consultants' services and operating costs. 9. COMMITMENTS AND CONTINGENCIES I Management is not aware of any commitments and contingencies, which would have a material impact on this special purpose project financial statements as at 31 October 2016 for the period from I 1 January 2016 to 31 October 2016. 10. GEORGIAN OPERATING ENVIRONMENT I The Center's operations are located in Georgia. Consequently, the Center is exposed to the economic and financial markets of Georgia, which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in Georgia. The special purpose project financial statements reflect management's assessment of the impact of the Georgian operating environment on the operations of the Center. The future operating environment may differ from management's assessment. 11. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE There were no significant events subsequent to the balance sheet date. I 12. APPROVAL OF FINANCIAL STATEMENTS These special purpose project financial statements were authorized for issue by the management of the Center on 28 December 2016. I I I I I I 12 I