Local Government Units Development and Lending Fund The International Development Association (IDA) Additional Contribution into Municipal Development Program – Phase II (Cycle I) – Window 5 (TF018184) Financial Statements For the Year Ended December 31, 2016 Together With Independent Auditors’ Report Local Government Units Development and Lending Fund IDA Additional Contribution into Municipal Development Program – Phase II (Cycle I) – Window 5 Statement of Revenues and Expenses and Changes in Net Assets For the Year Ended December 31, 2016 (Currency: USD) Note 2016 2015 Changes in unrestricted net assets: Revenues Released from temporarily restricted net assets 6 41,465 1,502,962 Interest income 758 1,831 Total unrestricted revenues 42,223 1,504,793 Expenses Project’s expenses 7 41,465 1,502,962 Transfer of interest revenue accumulated balance to LGUDLF general fund 507 1,515 Currency variance loss (gain) 21,037 (6,270) Total expenses 63,009 1,498,207 Net change in unrestricted net assets (20,786) 6,586 Changes in temporarily restricted net assets: Net assets released from restriction 6 (41,465) (1,502,962) Net change in temporarily restricted net assets (41,465) (1,502,962) Change in net assets (62,251) (1,496,376) Net assets, beginning of year 517,539 2,013,915 Net assets, end of year 455,288 517,539 The accompanying notes form an integral part of these financial statements 5 Local Government Units Development and Lending Fund IDA Additional Contribution into Municipal Development Program – Phase II (Cycle I) – Window 5 Cash Flows Statement For the Year Ended December 31, 2016 (Currency: USD) 2016 2015 Cash Flow from Operating Activities Change in net assets (62,251) (1,496,376) Adjustments to reconcile change in net assets to net cash flow from operating activities: Decrease in pledges receivable 370,849 2,484,863 (Decrease) in due to contractors (183,294) (802,791) Net cash flow from operating activities 125,304 185,696 Net change in cash at bank 125,304 185,696 Cash at bank, beginning of year 185,696 - Cash at bank, end of year 311,000 185,696 The accompanying notes form an integral part of these financial statements 6 Local Government Units Development and Lending Fund IDA Additional Contribution into Municipal Development Program – Phase II (Cycle I) – Window 5 Designated Bank Account Statement For the Year Ended December 31, 2016 Account number * 011/3301/033/0601954 / 11/02/0-0182001/004/0160 Depository bank * Bank of Palestine / the National Bank Address Ramallah Currency EUR 2016 2015 Equivalent Equivalent Note EUR in USD EUR in USD Balance, beginning of year 169,880 185,696 - - Add: Receipts during the year 5 332,001 370,849 2,183,343 2,484,863 Interest income 694 758 1,679 1,831 332,695 371,607 2,185,022 2,486,694 Deduct: Payments during the year** 204,751 224,759 2,013,760 2,305,753 Transfer of interest revenue accumulated balance to LGUDLF general fund 444 507 1,382 1,515 Currency variance loss (gain) - 21,037 - (6,270) 205,195 246,303 2,015,142 2,300,998 Balance, end of year 297,380 311,000 169,880 185,696 ** Reconciliation of expenses presented in the designated bank account statement with expenses presented in the statement of revenues and expenses and changes in net assets: USD 2016 2015 Expenses per the statement of revenues and expenses and changes in net assets 41,465 1,502,962 Change on due to contractors during the year 183,294 802,791 Expenses per designated bank account statement 224,759 2,305,753 * The designated bank account has been moved on November 9, 2016 from Bank of Palestine, account number 011/3301/033/0601954, to the National Bank, account number 11/02/0- 0182001/004/0160. The accompanying notes form an integral part of these financial statements 7 Local Government Units Development and Lending Fund IDA Additional Contribution into Municipal Development Program – Phase II (Cycle I) – Window 5 Notes to the Financial Statements For the Year Ended December 31, 2016 (Currency: USD) 1. LGUDLF and its Activities The Local Government Units Development and Lending Fund (LGUDLF) had been established under the name of the Municipal Development and Lending Fund (MDLF) according to Cabinet Decree No. 05/13/12 dated August 2007. As of November 10, 2016, Decree by Law No. 25 has been issued which changed the name of MDLF to the Local Government Units Development and Lending Fund (LGUDLF). LGUDLF is a semi- governmental juridical independent organization aiming at accelerating Palestine’s drive toward self-sustained, decentralized, prosperous and creditworthy local government units. The main objective of LGUDLF is to encourage the flow of financial resources to Local Government Units (LGU). According to Decree by Law No. 25 dated November 10, 2016, LGUDLF shall undertake the following missions: -  Management of funds received through support from the Palestinian National Authority (PNA) or provided by donor countries or any other sources in compliance with the terms and conditions specified in LGUDLF's internal bylaws.  Assist local authorities develop their capacities in compliance with the bases of modern management practices to help them provide better services to the public.  Guide assistance from donor countries and provide modern fiscal services to support and develop the services offered to local authorities and to improve their credit abilities.  Encourage local authorities to adopt developmental projects to expand their geographic jurisdiction so as to serve their developmental plans.  Facilitate and provide loans to local authorities and follow up the expenditures thereof from their revenues. LGUDLF is structured to ensure an efficient, transparent, and professional institution capable of fulfilling its mission and objectives. LGUDLF comprises of Board of Directors, executive departments, and other advisory committees. 2. MDP II and its Financing On July 7, 2013 an agreement (the Original Agreement) was signed between the International Development Association (IDA) and the Palestinian Liberation Organization, for the benefit of Palestinian National Authority, to contribute into the finance of Phase II (cycle I) of the Municipal Development Program (MDP II), in the amount of USD 10,000,000. Separate financial statements have been issued for the Original Agreement. In addition, on December 7, 2014, an amendment to the Original Agreement was signed between the two parties to extend an additional grant (IDA Additional 8 Contribution), (the Project), in an amount equal to USD 3,000,000 to fund Window 5 - Gaza Municipal Emergency Grants. These financial statements pertain to IDA Additional Contribution. MDP II is supported by PNA along with the Danish International Development Assistance (DANIDA), the Swedish International Development Cooperation Agency (SIDA), the World Bank, Kreditanstalt für Wiederaufbau (KfW), the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), the Netherlands (through VNG International), the Switzerland (through SDC), the Agence Française de Development (AFD) and the Belgian Development Agency (BTC) through its program (Local Government Reform and Development Programme – LGRDP). The MDP II will be implemented over the period of 3 years (2013-2016) in two cycles of approximately 18 months each. MDP II has five windows/components as follows: Window 1 - Provides municipalities with performance-based grants for municipal service delivery per mandate of municipalities defined in the Local Councils Law No. 1 of 1997, for sectors described as eligible in the Operations Manual as well as for operating expenditures for municipalities in Gaza. The municipalities’ allocation for this window will be calculated using the newly created Grant Allocation Mechanism. Municipalities decide on how to use the funds based on their Strategic Development and Investment Plans (SDIP) and consultation with citizens. Window 2 - pilots learning and innovation for municipal development, including implementation of the Ministry of Local Government (MoLG) policy decisions. This window finances goods, works and consultant services for capacity building and capital investments, including: (a) Strengthening Newly Amalgamated Municipalities that will support newly amalgamated municipalities towards achieving service levels in existing municipalities through financing small-scale social infrastructure and demand driven municipal capacity building packages. It will finance goods, works and consultant services. (b) Piloting Innovations for improved municipal responsiveness that will support:  Introduction of E-governance in four selected municipalities for more responsive service provision.  Renewable Energy that will assist municipalities in piloting sub-projects with a focus on solar energy for public buildings.  Support to Local Economic Development initiatives that will develop a municipal approach to LED and pilot the approach in 12 municipalities (6 per each cycle). Window 3 - Helps municipalities to improve their performance rankings in accordance to the new Grants Allocation Mechanism. It provides technical assistance to improve financial management, planning capacities and technical capabilities, particularly in operations and maintenance. This component would finance goods, works and consultants’ services and would be implemented in two cycles of approximately 18 months each. 9 Window 4 - This component will finance goods and consultants’ services for monitoring and evaluation, outreach and communication and local technical consultants for the engineering supervision of sub-projects under window 1 and the LGUDLF management fee. Window 5 - This window was designed under MDP II in response to Gaza emergency needs following the 51-day war in the summer of 2014 to restore municipal services in the Gaza Strip. The following table specifies the windows/ budget categories to be financed by IDA Additional Contribution: Additional Contribution Budget (USD) Window 4: Project Implementation Support and Management Costs 210,000 Window 5: Gaza Municipal Emergency Grants 2,790,000 3,000,000 The closing date of the Agreement with IDA is February 28, 2018. The accompanying financial statements pertain to IDA Additional Contribution into MDP II. 3. Summary of Significant Accounting Policies The financial statements have been prepared under the historical cost convention, the significant accounting policies follow: a. General Net assets, revenues, expenses, and gains and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets and changes therein are classified as unrestricted, temporarily restricted and permanently restricted. Unrestricted net assets are those whose use by LGUDLF is not subject to donor-imposed stipulations. Temporarily restricted net assets are those whose use by LGUDLF has been limited by donors’ specific time period or purpose. Permanently restricted net assets are those restricted by donors to be maintained by LGUDLF in perpetuity. During the year 2016, LGUDLF had no permanently restricted net assets. b. Temporarily Restricted Net Assets Unconditional promises to give cash, with no donor-imposed restriction on use, are recognized as revenues at the date promises to give are made. Unconditional promises to give cash, with temporarily donor-imposed restriction on use, are recorded as temporarily restricted net assets at the date promises to give are made, and recognized as revenues when the related costs are incurred. Unconditional promises with temporarily donor-imposed restriction are promises that depend only on passage of time and certain performance requested by the promising donors. Conditional promises to give and indications of intention to give are recorded at the fair market value at the date contribution is received by LGUDLF. 10 c. Pledges Receivable Pledges receivable are stated at the original amount of the signed agreement less the amount received, uncollectable amount (if any) and currency variances resulting from the fact that original agreements with the donors may be in currencies other than USD. d. Revenue Recognition Donations and contributions are recorded as pledges receivable and temporarily restricted net assets upon signing of the agreement with the donor. During the yearly close out process, the amount of expenses incurred is recognized as revenue under net assets released from restrictions and the temporarily restricted net assets account is reduced thereof. e. Accruals and Other Current Liabilities Accruals and other current liabilities are recognized for the amounts to be paid in the future for goods and services received, whether a bill is received from the supplier or not. f. Expenses Expenses are recorded by LGUDLF when incurred in accordance with the accrual basis of accounting, regardless of the date of actual payment. g. Foreign Currencies LGUDLF’s basic functional currency is the U.S. Dollar (USD). Transactions which are expressed or denominated in other currencies were translated to USD using exchange rates in effect at the time of each transaction. Assets and liabilities which are denominated in other currencies are translated to USD using exchange rates prevailing at the date of the statement of financial position. Gains and losses arising from the translation are reflected in the statement of revenues and expenses and changes in net assets. Foreign currency exchange rates against USD at December 31, 2016 and 2015 were as follow: - 2016 2015 One EUR 1.046 1.093 4. Cash at Bank The Project’s designated bank account showed the following balances as of December 31, 2016 and 2015: 2016 2015 Euro 297,380 169,880 Equivalent in USD 311,000 185,696 11 5. Pledges Receivable Pledges receivable as of December 31, 2016 and movement thereon during year follow: USD Amount Balance, Addition Received Beginning of During the During the Balance, Year Year Year End of Year Pledges receivable 515,137 - (370,849) 144,288 6. Temporarily Restricted Net Assets Temporarily restricted net assets as of December 31, 2016 and movement thereon during the year follow: USD Balance, Additions Net Assets Beginning (Grants and Released From Balance, of Year Donations) Restriction End of Year Temporarily restricted net assets 510,953 - (41,465) 469,488 7. Project’s Expenses Project’s expenses related to IDA Additional Contribution and comparison with budget follow: USD Actual Cumulative up to December Remaining Budget 2016 2015 31, 2016 Budget Window 4 : (a) Local Technical Consultant - - - - - (b) LGUDLF Management Fee 210,000 41,465 153,460 194,925 15,075 (c) Monitoring and Evaluation - - - - - (d) Outreach and Communication - - - - - Window 5: Gaza Municipal Emergency Grants 2,790,000 - 1,349,502 2,335,587 454,413 3,000,000 41,465 1,502,962 2,530,512 469,488 12