The Social Health Insurance Project funded under Loan Agreement No. 8617-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development Financial Statements for the Year Ended December 31, 2019 And Independent Auditors’ Report CONTENTS Independent Auditors’ Report Financial Statements Statement of Receipts and Disbursements of Funds ........................................... 1 Statement of Comparison of Budget and Actual Amounts ................................... 2-3 Statement of Disbursements by Component ................................................... 4-5 Notes to the Financial Statements ............................................................ 6-11 Тел.: +7 727 331 31 34 ТОО “BDO Kazakhstan” Факс: +7 727 331 31 35 ул. Габдуллина, 6 info@bdokz.com Алматы, Казахстан www.bdokz.com 050013 Tel: +7 727 331 31 34 BDO Kazakhstan LLP Fax: +7 727 331 31 35 6 Gabdullin Street info@bdokz.com Almaty, Kazakhstan www.bdokz.com 050013 Independent Auditors’ Report To Management of the Social Health Insurance Project funded under Loan Agreement No. 8617-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development Audit Opinion We have audited the accompanying financial statements of the Social Health Insurance Project (hereinafter the “Project”) funded under Loan Agreement No. 8617-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development, which comprise the statement of receipts and disbursements of funds for the year ended December 31, 2019, statement of comparison of budget and actual amounts for the year ended December 31, 2019, statement of disbursements by component for the year ended December 31, 2019, and a summary of significant accounting policies and other explanatory notes (hereinafter the “financial statements”). In our opinion, the accompanying financial statements present fairly, in all material respects, the Project’s receipts and disbursements for the year ended December 31, 2019 and the cash position as at December 31, 2019 in accordance with the International Public Sector Accounting Standard (IPSAS) «Financial Reporting under the Cash Basis of Accounting» published by the International Federation of Accountants (IFAC), as well as in accordance with the requirements of the International Bank for Reconstruction and Development. Basis for Opinion We conducted our audit in accordance with the International Standards on Auditing. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Project in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in Kazakhstan, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our opinion. Management’s Responsibilities for the Financial Statements Management of the Project is responsible for the preparation and fair presentation of these financial statements in compliance with the International Public Sector Accounting Standard «Financial Reporting under the Cash Basis of Accounting» published by the International Federation of Accountants (IFAC) and in accordance with the requirements of the International Bank for Reconstruction and Development, and for such internal control as management determines is necessary to enable preparation of the financial statements that are free from material misstatement, whether due to fraud or error. Товарищество с ограниченной ответственностью “BDO Kazakhstan”, зарегистрированное в соответствии с законодательством Республики Казахстан, является членом международного объединения BDO International Limited, британского общества с ответственностью, ограниченной гарантией его участников. BDO Kazakhstan, a limited liability partnership, registered under the laws of the Republic of Kazakhstan, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. Independent Auditors’ Report (continued) In preparing the financial statements, management is responsible for assessing the Project’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 management either intends to liquidate the Project, or to cease its operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Project’s financial reporting process. Auditor’s Responsibilities 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 the International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or errors 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 financial statements. As part of the audit in accordance with the International Standards on Auditing, we exercise professional judgment and maintain professional skepticism 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 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;  Conclude on the appropriateness of management’s 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 Project’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, if such disclosures are inadequate, to modify our opinion. 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 Project to cease to continue as a going concern.  Evaluate the overall presentation of the financial statements, its structure and content, including the disclosures, and whether the financial statements represent the underlying transactions and events in matter that achieves fair presentation. The Social Health Insurance Project funded under Loan Agreement No. 8617-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development Financial Statements STATEMENT OF COMPARISON OF BUDGET AND ACTUAL AMOUNTS For the Year Ended December 31, 2019 2019 Budget for 2019 Variance Notes Proceeds from Proceeds from US dollars Proceeds from the the the Government IBRD Loan Total IBRD Loan Government of Total IBRD Loan Government of Total of the Republic the Republic the Republic of of Kazakhstan of Kazakhstan Kazakhstan EXPENDITURES Part 1: Provide support for the implementation of the - - - - - - - - - Borrower's Social Health Insurance (SHI) system Consultants’ services 2,891,208 346,496 3,237,704 2,891,207 398,270 3,289,477 100% 87% 98% Training 26,472 2,282 28,754 26,473 2,625 29,098 100% 87% 99% 2,917,680 348,778 3,266,458 2,917,680 400,895 3,318,575 100% 87% 98% Part 2: Strengthen the delivery of health services to support the implementation of the Borrower's SHI system Consultants’ services 3,218,645 65,765 3,284,410 3,218,646 128,247 3,346,893 100% 51% 98% Training 846,576 627 847,203 844,883 1,223 846,106 100% 51% 100% 4,065,221 66,392 4,131,613 4,063,529 129,470 4,192,999 100% 51% 99% Notes on pages from 6 to 11 form an integral part of these financial statements 2 The Social Health Insurance Project funded under Loan Agreement No. 8617-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development Financial Statements STATEMENT OF DISBURSEMENTS BY COMPONENT For the Year Ended December 31, 2019 Cumulative amount from the Project start date 2019 through December 31, 2019 Notes Proceeds from Proceeds from the Government the Government IBRD Loan Total IBRD Loan Total of the Republic of the Republic US dollars of Kazakhstan of Kazakhstan EXPENDITURES Part 1: Provide support for the implementation of the Borrower's Social Health Insurance (SHI) system Consultants’ services 2,891,208 346,496 3,237,704 3,197,916 381,277 3,579,193 Training 26,472 2,282 28,754 26,472 2,282 28,754 2,917,680 348,778 3,266,458 3,224,388 383,559 3,607,947 Part 2: Strengthen the delivery of health services to support the implementation of the Borrower's SHI system Consultants’ services 3,218,645 65,765 3,284,410 5,172,192 75,412 5,247,604 Training 846,576 627 847,203 905,477 627 906,104 4,065,221 66,392 4,131,613 6,077,669 76,039 6,153,708 Notes on pages from 6 to 11 form an integral part of these financial statements 4 The Social Health Insurance Project funded under Loan Agreement No. 8617-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS For the Year Ended December 31, 2019 1. GENERAL PROVISIONS Kazakhstan Business Environment Project activities are carried out in Kazakhstan. Accordingly, the Project is exposed to risks specific to economic and financial markets of Kazakhstan, whose economy shows specific features of an emerging economy. The legal, tax and regulatory frameworks continue to develop, but are subject to varying interpretations and frequent changes which together with other legal and financial impediments contribute to the challenges faced by entities operating in Kazakhstan. Nature of Operations Loan Agreement No. 8617-KZ (hereinafter the “Agreement”) between the Government of the Republic of Kazakhstan (hereinafter the “Government”) and the International Bank for Reconstruction and Development (hereinafter “IBRD”) was signed on November 1, 2016 and ratified on May 30, 2017 (the “Project start date”). Under the Agreement, IBRD provides a loan of 80,000,000 US dollars (the “Loan”) for the purpose of implementing the Social Health Insurance Project (the “Project"), which shall be repaid by the Government after the end of the grace period, i.e. from October 15, 2021 through April 15, 2031. As per the approved budget for 2019, the Project receipts and disbursements financed out of the proceeds of the IBRD Loan and co-financing of the external loan by the Government of Kazakhstan were estimated to amount to 8,948,345 US dollars and 651,540 US dollars, respectively (20182,761,277 US dollars and 327,043 US dollars, respectively) . The amounts are budgeted in Kazakhstani tenge and translated into US dollars at the average foreign exchange rate for the relevant period established by the National Bank of the Republic of Kazakhstan. The objective of the Project is to improve accessibility, quality and efficiency of health service delivery, and reduce financial risks to the population that are caused by serious health problems. The Project is implemented by the Ministry of Healthcare of the Republic of Kazakhstan, which acts as an Implementing Agency on behalf of the Government of the Republic of Kazakhstan. The Project consists of the following parts: Part 1. Provide support for the implementation of the Borrower's Social Health Insurance (SHI) system A. Establish and strengthen the organizational and institutional structure of the SHI system through the provision of advisory services and capacity building in support of the following activities: • (i) forecasting SHI revenues and improving the mechanisms for SHI revenue collection; • (ii) planning the budget for the SHI system, based on the needs of the population; • (iii) providing institutional support for the SHIF operation; • (iv) improving health care benefits packages; and • (v) improving the SHI information technology system for integration with the Borrower's existing e-Health system. 6 The Social Health Insurance Project funded under Loan Agreement No. 8617-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS (continued) B. Strengthen the purchasing and payment arrangements under SHI, through the provision of advisory services and capacity building, to support the design and piloting of the following reform activities: • (i) improving the purchasing arrangements and provider payment methods for health services; • (ii) improving the purchasing arrangements for pharmaceuticals and health technologies; and • (iii) improving the financial control mechanisms and technical audits used within the SHI system. Part 2. Strengthen the delivery of health services to support the implementation of the Borrower's SHI system A. Develop a health facility network, involving the: • (i) establishment of a public health service to increase the promotion of a healthy lifestyle, reduce risk factors for non-communicable diseases, strengthen the epidemiological surveillance system for outbreaks, and build capacity in public health policy planning and health services delivery; • (ii) provision of assistance to improve primary and secondary prevention and to strengthen primary health care services, with a focus on managing non-communicable diseases and performance-based services; • (iii) provision of support to implement prospective plans for developing a health facility network; and • (iv) strengthening of the Borrower's emergency medical services. B. Manage the quality of health care services, involving the: • (i) improvement of clinical practice by developing a system for implementing, and monitoring the introduction of, clinical protocols; • (ii) further development of health technology assessments; • (iii) expansion of disease management programs; and • (iv) enhancement of quality management mechanisms in health facilities and development of a health facility accreditation program. C. Strengthen human resources for health care through strategic partnership, involving the: • (i) improvement of the principles for managing and financing medical science education; • (ii) improvement of the education process in line with international standards to advance the quality of medical science education for health workers; • (iii) improvement of the system for independently assessing the knowledge and skills of graduates of higher medical science education institutions and health workers; and • (iv) provision of support for the improvement of human resources management in health facilities. Part 3. Project management, monitoring and evaluation, communications strategy A. Provision of support for Project management through: • (i) provision of advisory services, communications services, goods (equipment for the Project Management Unit (PMU)), non-consulting services and training; • (ii) carrying out surveys for Project monitoring and evaluation; and • (iii) financing the PMU operating costs. 7 The Social Health Insurance Project funded under Loan Agreement No. 8617-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS (continued) B. Provision of support for information, education and communication activities concerning structural reforms in health service delivery that are supported by the Project. C. Provision of support for citizen engagement activities, including: • (i) annual multi-stakeholder forums held to present and receive feedback on the progress of Project-related reforms; • (ii) implementation of a community monitoring instrument to track patient perception of the improvements in the provision of health services; and • (iii) implementation of a proactive grievance redress mechanism for addressing suggestions and complaints from beneficiaries and various stakeholders. Expenditures are allocated between the components in the statement of disbursements by component based on the comparison of work description in the Agreement and work description in source documents. 2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS These financial statements have been prepared in accordance with the International Public Sector Accounting Standard (IPSAS) Financial Reporting under the Cash Basis of Accounting published by the International Federation of Accountants, and in accordance with the requirements of the International Bank for Reconstruction and Development. 3. SIGNIFICANT ACCOUNTING POLICIES The accounting policies described below have been consistently applied in the reporting periods presented in these financial statements Cash Method of Accounting Cash method of accounting recognizes transactions and events only when cash is received or paid under the Project. Presentation Currency These financial statements are presented in US dollars. Foreign Currency Transactions Transactions in foreign currencies are translated to the presentation currency at the exchange rates ruling at the transaction dates. Direct payments from IBRD are translated into US dollars at the exchange rates established by the National Bank of the Republic of Kazakhstan at the date of reconversion. Proceeds from the Government of the Republic of Kazakhstan are translated into US dollars at the exchange rates set by the National Bank of the Republic of Kazakhstan at the payment date. The foreign exchange differences arising from translation of transactions denominated in other currencies into US dollars are presented as a net effect of changes in foreign exchange rates. Expenditure Categories The Agreement specifies the main categories of expenditures financed by the Loan, the amount for each category, as well as the percentage of expenditures to be financed in each category. According to the Agreement, there are the following categories of expenditures: (1) Non-consulting services, consultants’ services and Trainings under Part 1 of the Project; (2) Goods, non-consulting services, consultants’ services and Trainings for Part 2 and 3 of the Project, as well as operating costs under Part 3 of the Project. 8 The Social Health Insurance Project funded under Loan Agreement No. 8617-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS (continued) Cash Received According to the terms and conditions of the Agreement, the Government of the Republic of Kazakhstan shall pay interest and the principal amount of the Loan. Those payments are recorded on the accounts of the Government and not reported in these financial statements. The date of payment of the last installment on the Loan by the Government is April 15, 2031. 4. CASH To perform transactions on Loan No. 8617-KZ the following designated accounts have been opened with the Committee of Treasury of the Ministry of Finance of the Republic of Kazakhstan, the city of Nur-Sultan, for making cash payments to suppliers:  KZ10125USD1002300142 in US dollars;  KZ460702012260001002 in KZT. Cash balances as at December 31 and transactions of the account for the year ended December 31, 2019 are detailed below: In US dollars 2019 2018 Balance at January 1 38,759 117 RECEIPTS Cash receipts to account 6,118,650 1,630,380 6,118,650 1,630,380 EXPENDITURES Project expenditures 6,151,929 1,590,644 Net foreign exchange loss (2,608) 1,094 6,149,321 1,591,738 Balance at December 31 8,088 38,759 Including those denominated: In US dollars - - In KZT 8,088 38,759 5. DIRECT PAYMENTS AND REPLENISHMENT OF ACCOUNT Direct payments under the Project are made by IBRD and the Government of the Republic of Kazakhstan directly to suppliers chosen in accordance with the terms and conditions of the Agreement. Direct payments to Suppliers and replenishment of the designated account by IBRD under the Project for the year ended December 31, 2019 were made based on the following withdrawal applications: 9 The Social Health Insurance Project funded under Loan Agreement No. 8617-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS (continued) US dollars No. of Date of Direct Replenishment of withdrawal Total withdrawal payments account application 19 15.02.19 - 143,000 143,000 20 15.02.19 - 42,200 42,200 21 06.03.19 - 43,000 43,000 22 19.04.19 - 762,000 762,000 23 16.05.19 - 252,000 252,000 24 22.05.19 170,890 - 170,890 26 26.06.19 - 73,050 73,050 27 09.07.19 796,695 - 796,695 28 09.07.19 - 326,400 326,400 30 09.08.19 176,212 - 176,212 29 13.08.19 - 1,562,000 1,562,000 31 21.10.19 292,241 - 292,241 32 15.11.19 - 1,155,000 1,155,000 34 20.12.19 912,070 - 912,070 35 20.12.19 1,760,000 1,760,000 Total 2,348,108 6,118,650 8,466,758 Statement of Expenditures (SOE) US dollars Actual expenditures by categories (2) Goods, non- (1) Non-consulting No. of consulting services, Total services, withdra consultants’ services amount of consultants’ wal Value date and Trainings for Part 2 the services and Total applicati and 3 of the Project, as application Trainings under on well as operating costs Part 1 of the under Part 3 of the Project Project. 19 15.02.19 143,000 - - - 20 15.02.19 42,200 - - - 21 06.03.19 43,000 - - - 22 19.04.19 762,000 240,432 965,626 1,206,058 23 16.05.19 252,000 - - - 26 26.06.19 73,050 - - - 28 09.07.19 326,400 - - - 29 13.08.19 1,562,000 148,551 1,230,416 1,378,967 32 15.11.19 1,155,000 - - - 35 20.12.19 1,760,000 242,750 1,641,115 1,883,865 Total 6,118,650 631,733 3,837,157 4,468,890 10 The Social Health Insurance Project funded under Loan Agreement No. 8617-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS (continued) 6. UNUSED PORTION OF THE LOAN As at December 31, 2019, the unused portion of the IBRD Loan amounted to 68,568,150 US dollars (2018: 77,034,908 US dollars). 7. SUBSEQUENT EVENTS After the reporting date, a state of emergency was introduced in the Republic of Kazakhstan in connection with the outbreak of the coronavirus COVID-19. The introduction of quarantine in all areas of Kazakhstan has a negative effect on the economy and the Government has developed a package of urgent measures to maintain business to reduce these consequences. The degree of impact of COVID-19 on the utilization of the Project’s funds will depend on certain events, including the duration and spread of the virus, the impact on the customers, employees and suppliers of the Project. At the moment, the degree to which COVID-19 can affect the flow and expenditure of Project funds is difficult to assess with a reasonable degree of certainty. The management believes that the onset of adverse effects is unlikely and the situation with COVID-2019 will not lead to a violation of the terms of the Agreement and other adverse consequences for the Project, with the exception of temporary delays in the use of loan funds during the quarantine regime. 8. DATE OF ISSUE These financial statements have been approved for release by the Executive Secretary of Healthcare of the Republic of Kazakhstan and Acting director of the Department for Coordination of Compulsory Social Health Insurance of the Ministry of Healthcare of the Republic of Kazakhstan on May 25, 2020. 11 The Social Health Insurance Project funded under Loan Agreement No. 8617-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development Appendix No. 1 Reconciliation between the data provided by Project Management Unit and World Bank payments data US dollars Application Date of for As per PMU As per WB Variance withdrawal withdrawal 19 15.02.19 143,000 143,000 - 20 15.02.19 42,200 42,200 - 21 06.03.19 43,000 43,000 - 22 19.04.19 762,000 762,000 - 23 16.05.19 252,000 252,000 - 24* 22.05.19 170,890 170,890 - 26 26.06.19 73,050 73,050 - 27* 09.07.19 796,695 796,695 - 28 09.07.19 326,400 326,400 - 30* 09.08.19 176,212 176,212 - 29 13.08.19 1,562,000 1,562,000 - 31* 21.10.19 292,241 292,241 - 32 15.11.19 1,155,000 1,155,000 - 34* 20.12.19 912,070 912,070 - 35 20.12.19 1,760,000 1,760,000 - Total 8,466,758 8,466,758 - *) Application for direct payment 12