MUNICIPAL DEVELOPMENT FUND OF GEORGIA LOAN NO.8148-GE (REGIONAL DEVELOPMENT PROJECT) Special Purpose Project Financial Statements and Independent Auditor's Report For the Period Ended 30 April 2018 MUNICIPAL DEVELOPMENT FUND OF GEORGIA REGIONAL DEVELOPMENT PROJECT LOAN NO.8148-GE TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS 1 INDEPENDENT AUDITOR'S REPORT 2-3 SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD ENDED 30 APRIL 2018: 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 MUNICIPAL DEVELOPMENT FUND OF GEORGIA STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD ENDED 30 APRIL 2018 Management of the Regional Development Project (the "Project") financed under the Loan Agreement No. 8148-GE dated 28 March 2012, implemented by the Municipal Development Fund of Georgia ("MDF") is responsible for the preparation of the special purpose project financial statements that present the project's statement of financial position as at 30 April 2018, the summary of sources and uses of funds, summary of expenditure by activity, statement of expenditure ("SOE") and designated account statements, in accordance 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 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; * 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, 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 ended 30 April 2018 were authorised for issue on 15 June 2018 by the Management. On behalf of Management: Juansher Burchuladze/ Natalie Godiiashvili Acting Executive birector Head of Financial Management and Investments Unit 15 June 2018 15 June 2018 1 Deloitte & Touche LLC King David Business Center 12 Merab Aleksidze Street D e lo itte TbilJsl, 0171, Georgia Tel: +995 (32) 224 45 66 Fax: +995 (32) 224 45 69 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 Regional Development Project (the "Project") financed under the Loan Agreement No. 8148-GE dated 28 March 2012, implemented by the Municipal Development Fund of Georgia, which comprise the Project's statement of financial position as at 30 April 2018, the summary of sources and uses of funds, summary of expenditure by activity, statement of expenditure ("SOE") and designated account statements for the 16 months period ended 30 April 2018 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 financial statements of the Project for the period ended 30 April 2018 are prepared, in all material respects, in accordance 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"). 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 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 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. 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, which requires the special purpose project financial statements to comply with the World Bank Guidelines. 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. Project completion date We draw your attention to Note 11 of these special purpose project financial statements, which discloses that the project's closing date is 31 December 2017 with a grace period of four months after the closing date. Our opinion is not modified in respect of this matter. Delolte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company kmited by gaerantee (`DTTL"), its network of member firms, and their related entities. DTTL and each of its member flrm are legall separate and independent entities. DTTL (also referred to as "Deloitte Global") does not provide services to dients Peasesre sefor a more detailed description of DTL and its member firms. @F 2016 Deloitte &Touche LLC. All rJghts reserved. 2 Deloitte Responsibility of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation of these special purpose project financial statements in accordance with the basis of accounting described in Note 2 and in conformity with the World Bank's Financial Management Manual for World Bank Financed Investment Operations 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. Auditor's Responsibilities for the Audit of the 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 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 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 Organisation'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 internal control that we identify during our audit. Tamar Natsvlishvili On behalf of Deloitte and Touche LLC 15 June 2018 Tbilisi, Georgia :3 、，」〕一〕：〕：〕〕〕〕、、寸 MUNICIPAL DEVELOPMENT FUND OF GEORGIA REGIONAL DEVELOPMENT PROJECT LOAN NO. 8148-GE STATEMENT OF FINANCIAL POSITION FOR THE PERIOD ENDED 30 APRIL 2028 (in US Dolla r !) 30 April 31 December Note 2018 2016 ASSETS IBRD Special Account 2,404,990 6,0B6,170 Prepayments 895,937 TOTAL ASSETS 2,404,990 07 LIABILITIES Payables 181,525 4 705 TOTAL LIABILITIES 181,525 421,705 NET ASSETS 2,223,465 6,560,402 Cumulative Funds received: IBRD Loan 8148-GE 59,671,734 59,400,708 Government of Georgia 16,816,658 15,651,649 MDF Funds 44,788 44,788 Other income 96,011 94,976 Total funds received 76,629,191 75,192,121 Cumulative expenditure: Cumulative project expenditure: 7 74,661,350 68,7a9,619 74,661,350 68,789,619 Foreign exchange gain 255,6Z4 157,900 TOTAL NET ASSETS 2,223,465 6,560,402 On behalf of Management: /1) P Juansher Burchuladze Natalie Godziashvili Acting Executive Director Head of Financial Management and Investments Unit 15 June 2018 15 June 2018 The notes on pages 9 to 13 form an Integral part of these special purpose project financial statements. 5 MUNICIPAL DEVELOPMENT FUND OF GEORGIA REGIONAL DEVELOPMENT PROJECT LOAN NO. 8148-GE SUMMARY OF EXPENDITURE BY ACTIVITY FOR THE PERIOD ENDED 30 APRIL 2018 (in US Dollars) Actual Planned Variance Project Period Cumulative Period Cumulative Period Cumulative activities ended as at ended as at ended as at 30.04.2018 30.04.2018 30.04.2018 30.04.2018 30.04.2018 30.04.2018 Unaudited Unaudited Unaudited Unaudited Component 1: Infrastructure investment 4,679,789 67,685,124 4,679,789 67,685,124 Component 2: Institutional development 1,191,941 6,826,226 1,191,941 6,826,226 Front end fee -150,000 -150,000 TOTAL EXPENDITURE 5,871,730 74, 5 71730 74,661,350 On behalf of Management: Juansher Burchufadip Natalie Godziashvili Acting Executive Director Head of Financial Management and Investments Unit 15 June 2018 15 June 2018 The notes on pages 9 to 13 form an integral part of these special purpose project financial statements. 6 MUNICIPAL DEVELOPMENT FUND OF GEORGIA REGIONAL DEVELOPMENT PROJECT LOAN NO. 8148-GE STATEMENT OF EXPENDITURE ("SOE") FOR THE PERIOD ENDED 30 APRIL 2018 (In US Dollars) Withdrawal Consulting Withdrawal application Works and services and Operating No. date Total SOE Goods training costs 25 17.05.2017 745,639 722,172 - 23,467 26 03.10.2017 998,657 837,772 49,098 111,787 27 14.11.2017 630,362 570,619 24,706 35,037 29 20.12.2017 225,726 202,910 6496 16,320 31 05.04.2018 504,023 453,501 34,743 15,779 32 26.04.2018 188,788 188,788 - - 3,293,195 2,975,762 115,043 202,390 Part of the expenditure in amount of USD 519,944 under withdrawal application No. 25 is attributable to 2016 and recorded as expenditure in the 2016 financial statements respectively. The withdrawal application for these expenses were submitted to International Bank for Reconstruction and Development in 2017. On behalf of Management: Juansher Burchuladzd Natalie Godziashvili Acting Executive Director Head of Financial Management and Investments Unit 15 June 2018 15 June 2018 The notes on pages 9 to 13 form an Integral part of these special purpose project financial statements. 7 MUNICIPAL DEVELOPMENT FUND OF GEORGIA REGIONAL DEVELOPMENT PROJECT LOAN NO. 8148-GE STATEMENT OF DESIGNATED ACCOUNT FOR THE PERIOD ENDED 30 APRIL 2018 (in US Dollars) Account No. 202250930 Depository Bank State Treasury Address 16 V. Gorgasali street Tbilisi, 0114 Georgia Opening Balance Note 6,086,170 Funds received from IBRD - Less: Refund to WB from Designated Account ('DA") - Present outstanding amount advanced to DA 6,086,170 DA closing balance as at 30 April 2018 2,404,990 Add: Amount of eligible expenditure paid 9 3,681,180 Total advance accounted for 6,086,170 On behalf of Management: 3uansher Burchulail; Natalie GodziAshvili Acting Executive Director- Head of Financial Management and Investments Unit 15 June 2018 15 June 2018 The notes on pages 9 to 13 form an integral part of these special purpose project financial statements. 8 MUNICIPAL DEVELOPMENT FUND OF GEORGIA REGIONAL DEVELOPMENT PROJECT LOAN NO. 8148-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD ENDED 30 APRIL 2018 (in US Dollars) 1. BACKGROUND Municipal Development Fund ("MDF") was established by the Government of Georgia by Presidential Decree # 294 of June 7, 1997 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 infrastructure sector projects. The International Bank for Reconstruction and Development Loan Agreement No. 8148-GE (the "Agreement") in the amount of 60 million United States Dollars ("USD") was signed between the Government of Georgia ("GoG") and International Bank for Reconstruction and Development ("IBRD") on 28 March 2012 ("inception"). The main objectives of the loan are: providing support to Local Self-government to carry out investment subprojects for urban regeneration, including the rehabilitation of municipal infrastructure and utilities in the central historical areas, the conservation and upgrading of public spaces, carrying out investment subprojects to attract private sector investments in tourism and agroprocessing; Enhance the institutional capacity and performance of the Georgia National Tourism Administration, the Agency for Culture Heritage Preservation of Georgia, MDF and other local and regional entities. The closing date of the loan is 31 December 2017. 2. ACCOUNTING POLICIES Basis of accounting - These special purpose project financial statements have been prepared in accordance with the World Bank's Financial Management Sector Board's "Guidelines: Annual Financial Reporting and Auditing for World Bank Financed Activities" and the accounting policies set out below. The special purpose project financial statements have been prepared on the accrual basis of accounting. 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. Funds received -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. Expenditure - Expenditure is recognised on an accruals basis as a use of project funds when liabilities are incurred. Functional currency - These special purpose project financial statements are expressed in United States Dollars ("US Dollar" or "USD"). 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. Monetary items are translated into US Dollars at the National Bank of Georgia ("NBG") official exchange rate at the reporting date. 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. 9 MUNICIPAL DEVELOPMENT FUND OF GEORGIA REGIONAL DEVELOPMENT PROJECT LOAN NO. 8148-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD ENDED 30 APRIL 2018 (CONTINUED) (in US Dollars) 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") at a proportional rate of 80% and 20%, respectively. IBRD GoG Total Works and goods 55,681,000 13,959,000 69,640,000 Consulting services and training 2,945,000 735,000 3,680,000 Operating costs 1,224,000 306,000 1,530,000 Front-end fee 150,000 - 150,000 Total: 60,000,000 15000,000 75,000,000 5. METHODS OF WITHDRAWAL The methods of withdrawal used from the inception of the loan to 30 April 2018 were as follows: (a) Designated Account Municipal Development Fund withdraws the eligible amounts from the designated account and 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 loan agreement for direct payments of eligible expenditures for sub-projects. Direct payments are made by the World Bank directly to third parties. MDF 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 Government of Georgia are accumulated. The funds are further disbursed to sub-contractors based on the share of expenditures to be incurred. 6. STATEMENT OF EXPENDITURE 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 4,000,000; (ii) Consultant services contracts (firms) valued at less than USD 200,000; (iii) Consultant services contracts (individuals) valued at less than USD 50,000; and (iv) All expenditures for Goods valued at less than USD 300,000; 10 MUNICIPAL DEVELOPMENT FUND OF GEORGIA REGIONAL DEVELOPMENT PROJECT LOAN NO. 8148-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD ENDED 30 APRIL 2018 (CONTINUED) (in US Dollars) 7. PROJECT EXPENDITURE BY FUND Actual Year to Cumulative to Project activities date date Works and goods 3,077,170 52,620,241 Consulting services and training 653,313 3,481,555 Operating costs 202,498 1,221,996 Front-end fee - 150,000 IBRD TOTAL 3,932,981 57,473,892 Works and goods 1,602,619 14,823,633 Consulting services and training 280,919 1,792,151 Operating costs 55,211 330,424 Resettlement costs - 102,911 GoG TOTAL 1,938,749 17,049,119 Works and goods - 138,339 MDF TOTAL - 138,339 TOTAL PROJECT EXPENDITURE 5,871,730 74,661r350 The Project consists of the following main components: Component 1 - Infrastructure Investment * Provision of financial resources to local self-government to carry out investment subprojects for Urban regeneration: an integrated approach for renewal of Telavi, Kvareli and the heritage village of Dartlo; * Tourism circuit development: Integrated approach to culture heritage site upgrading and improved management In the most attractive 11 cultural heritage sites located along the main tourism circuit/route in Kakheti; and * Provision of financial resources to local self-government to carry out Investment Subprojects for public infrastructure to attract private sector investments in tourism and agro- processing. Component 2 - Institutional Development Enhancing the institutional capacity and performance of the Georgia National Tourism Administration ("GNTA"), the Agency for Culture Heritage Preservation of Georgia ("ACHP"), the Project Implementing Entity (MDF), and other local and regional entities to carry out the following activities: * Destination management and promotion, including local outreach campaign; * Geo-tourism routes and tourism portal; * Skilled workforce development and capacity building; * Construction supervision and sustainable site management of cultural heritage; and * Performance monitoring and evaluation activities. 11 MUNICIPAL DEVELOPMENT FUND OF GEORGIA REGIONAL DEVELOPMENT PROJECT LOAN NO. 8148-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD ENDED 30 APRIL 2018 (CONTINUED) (in US Dollars) 8. RECONCILIATION OF DESINGATED ACCOUNT WB GoG Total Expenditures incurred during the year 3,932,981 1,938,749 5,871,730 Direct payment (271,026) - (271,026) Change in prepayments (199,089) (696,848) (895,937) Change in payables 149,816 90,364 240,180 Foreign exchange 68,498 29,225 97,723 Amount of eligible expenditure paid 3,681,180 1,3611490 9. 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 Account Statement as at 30 April 2018 and on the funds received and disbursed during the period then ended. 10. 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, 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 2016 and 2017 paved the way, more can be expected as Georgia's action plan for achieving accession to the European Union continues to develop. 11. PROJECT COMPLETION The Project was completed as at 31 December 2017 (the Closing Date), and the Grace period for submitting withdrawal application for expenditures incurred before the Closing date is 30 April 2018 (Reporting date). As at the date of signing these special purpose financial statements: a) No expenditures related to the Project were incurred after the Closing Date; the payments made during the Grace period related to expenditures incurred before the Closing Date. b) No expenditure related to the Project were submitted to World Bank after the Reporting date; c) No withdrawals from IBRD Loan 8148-GE were made after the Reporting date; d) The amount of USD 2,404,990 outstanding at the designated account of IBRD Loan 8148- GE was refunded to World Bank on 29 May 2018; e) The current outstanding payable under ongoing contracts in the amount of USD 181,525 will be settled by MDF with assistance of the Government of Georgia; f) The management is not aware about any pending or existing litigations against the Project. 12 MUNICIPAL DEVELOPMENT FUND OF GEORGIA REGIONAL DEVELOPMENT PROJECT LOAN NO. 8148-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE PERIOD ENDED 30 APRIL 2018 (CONTINUED) (in US Dollars) 12. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE Except the matters discussed in the Note 11 above, there were no significant events subsequent to the balance sheet date that require adjustment or disclosure in these special purpose project financial statements. 13. APPROVAL OF SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS These special purpose Financial statements were authorised for issue by the Management of MDF on 15 3une 2018. 13