REPUBLIC OF TURKEY PRIME MINISTRY Undersecretariat of Treasury INDEPENDENT AUDITOR'S REPORT On EU/IPA ENERGY SECTOR PROGRAM PROJECT Implemented by MINISTRY OF ENERGY AND NATURAL RESOURCES GENERAL DIRECTORATE FOR EU AFFAIRS AND FOREIGN RELATIONS And Financed Under World Bank Grant Agreement numbered TF-016532 As of January, 2018 and For The Year Then Ended Report Number 256/4 - 54/7 Prepared by: R. Billent DEMIRBAG Alper ERGEN Senior Treasury Controller Treasury Controller 14 June 2018 TABLE OF CONTENTS 1. EXECUTIVE SUMMARY 2. INDEPENDENT AUDITOR'S REPORT & FINANCIAL STATEMENTS OF THE PROJECT 2.1. Independent Auditor's Report 2.2. Statement of Sources and Uses of Funds 2.3. Statement of Cumulative Investments 2.4. Statement of Requests for Reimbursement (SOE Statement) 2.5. Statement of Special Account 2.6. Notes to The Project Financial Statements EXECUTIVE SUMMARY EXECUTIVE SUMMARY A. Project Summary The Grant Agreement for the EU/IPA Energy Sector Program Project with European Union Instrument for Pre-Accession Trust Fund Grant Number TF016532-TR was signed on 30/05/2014 by the World Bank acting as administrator of the aforementioned Trust Fund and Undersecretary of Ministry of Energy and Natural Resources representing the recipient of the grant, Republic of Turkey. The World Bank agreed to extend to the recipient, on the terms and conditions set forth or referred to in the Grant Agreement, a grant in an amount equal to EUR 10.625.000. The objective of the EU/IPA Energy Sector Program Project (Project) is enhancement of the Turkish Energy Sector in line with the EU energy priorities and strategies in energy efficiency, renewable energy and the natural gas market. Ministry of Energy and Natural Resources, General Directorate for EU Affairs and Foreign Relations, Department for EU Affairs and IFIs was appointed by the Grant Agreement as the project implementation unit to carry out the Project. The project consists of the following parts; Part A: Ministry of Energy and Natural Resources Part B: Natural Gas Market Development Part C: Renewable Energy Development Part D: Energy Efficiency Promotion Part E: Visibility and Public Awareness According to the provisions of the Grant Agreement, the procurements made for the Project are classified into a single category named "Consultants' Services Under the Project". According to the Section IV article B(2) of the Schedule 2 "Project Execution" part of the Grant Agreement, the closing date of the Project is March 31, 2017 originally. Out of the negotiations between the World Bank and the Ministry of Energy and Natural Resources, the closing date of the Project has been postponed to September 28, 2017. The expenditure realized throughout the current audit period is EUR 6.866.423,02 resulting in the cumulative spending by the end of the audit period amount to EUR 10.343.124,86. B. Objectives of Audit The objectives of our audit are; a) To give an opinion on whether the financial statements, prepared as of January 31, 2018 and for the period then ended, present fairly, in all material respects, the financial position of the project in accordance with the cash receipts and disbursements basis of accounting, b) To determine, as of January 31, 2018, whether the Ministry of Energy and Natural Resources, General Directorate for EU Affairs and Foreign Relations has complied, in all material respects, with the rules and procedures of the Grant Agreement numbered TF-016532, c) To examine whether adequate supporting documentation has been maintained to support claims to the World Bank for reimbursements of expenditures incurred with respect to SOEs and evaluate eligibility of these expenditures for financing under the Grant Agreement. C. Scope of Audit We have performed an audit of financial statements of EU/IPA Energy Sector Program Project as of January 31, 2018 and for the period then ended in accordance with the cash receipts and disbursements basis of accounting. We have also performed a compliance audit on whether project activities are in line with the Grant Agreement. Our audit was conducted in accordance with International Standards on Auditing published by International Federation of Accountants (IFAC) applicable to the audit of financial statements and compliance auditing. There was no limitation in our scope for the Project's audit. D. Audit Results For the financial statements of project; our audit resulted with an unqualified opinion. As of January 31, 2018, Ministry of Energy and Natural Resources, General Directorate for EU Affairs and Foreign Relations has complied, in all material respects, with the rules and procedures of the Grant Agreement numbered TF-016532. In addition, with respect to SOEs, adequate supporting documentation has been maintained to support claims to the World Bank for reimbursements of expenditures incurred; and which expenditures are eligible for financing under the Grant Agreement numbered TF-016532. E. Management Recommendations A management letter, dated June 14, 2018, to the attention of the Ministry of Energy and Natural Resources, General Directorate for EU Affairs and Foreign Relations was issued separately from this report. The objective of this Management Letter is to enable the auditors to communicate appropriately to those charged with governance and management deficiencies in internal control that the auditors have identified during the audit and that, in the auditors' professional judgment, are of sufficient importance to merit their respective attentions. For this purpose, our recommendations are attached to the Letter. INDEPENDENT AUDITOR'S REPORT & FINANCIAL STATEMENTS OF THE PROJECT REPUBLIC OF TURKEY PRIME MINISTRY Undersecretariat of Treasury INDEPENDENT AUDITOR'S REPORT TO MINISTRY OF ENERGY AND NATURAL RESOURCES, General Directorate for EU Affairs and Foreign Relations, ANKARA Opinion We have audited the Statement of Sources and Uses of Funds, Statement of Cumulative Investments, Statement of Requests for Reimbursement (SOE Statement) and Statement of Special Account of the EU/IPA Energy Sector Program Project as of January 31, 2018, and for the period then ended, and a summary of significant accounting policies and other explanatory information. The financial statements have been prepared by Ministry of Energy and Natural Resources, General Directorate for EU Affairs and Foreign Relations based on relevant provisions of the Grant Agreement Numbered TF-016532. In our opinion; a) The accompanying Statement of Sources and Uses of Funds, Statement of Cumulative Investments, Statement of Requests for Reimbursement (SOE Statement) and Statement of Special Account present fairly, in all material respects, the financial position and accounting policies of the EU/IPA Energy Sector Program Project as of January 31, 2018 and for the period then ended in accordance with the provisions of the Grant Agreement Numbered TF-016532. b) Ministry of Energy and Natural Resources, General Directorate for EU Affairs and Foreign Relations, as of January 31, 2018 has complied with, in all material respects, the requirements of the Grant Agreement Numbered TF-016532. c) With respect to SOEs, adequate supporting documentation has been maintained to support claims to the World Bank for reimbursement of expenditures incurred, and these expenditures are eligible for financing under the Grant Agreement Numbered TF-016532. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the "Auditor's Responsibilities for the Audit of the Financial Statements" section of this report. We are independent of the Ministry of Energy and Natural Resources, General Directorate for EU Affairs and Foreign Relations within the meaning of ethical requirements and have fulfilled our other responsibilities under those ethical requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Basis of Accounting and Restriction on Distribution and Use We draw attention to Note "2" to the financial statements, which describe the basis of accounting. The financial statements are prepared to assist the Ministry of Energy and Natural Resources, General Directorate for EU Affairs and Foreign Relations to comply with the financial reporting provisions of the World Bank Grant Agreement Numbered TF-016532. As a result, the financial statements may not be suitable for another purpose. Our report is intended solely for the Ministry of Energy and Natural Resources, General Directorate for EU Affairs and Foreign Relations, Undersecretariat of Treasury, and World Bank, and should not be distributed or used by other parties. Responsibilities of Management and Those Charged with Governance for the Financial Statements Ministry of Energy and Natural Resources, General Directorate for EU Affairs and Foreign Relations is responsible for the preparation and fair presentation of these financial statements in accordance with Grant Agreement Numbered TF-016532, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Those charged with governance are responsible for overseeing the Ministry of Energy and Natural Resources, General Directorate for EU Affairs and Foreign Relations' financial reporting process. Auditor's Responsibilities for the Audit of the Financial Statements The objectives of our audit 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 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 judgment and maintain professional skepticism throughout the planning and performance of 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 entity's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. * Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We are required to 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. We are also required to provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. Ahmetm itSUCU Acting Chairman of Board of Treasury Controllers A. Billent BOYACIOGLU (Audit Partner) Vice-Chairman R. BOlen MIRBAG Alper ERGEN Senior Treasury Controller Treasury Controller Date : June 14, 2018 Address: T.C. Ba bakanlik Hazine Mtisteparligi Hazine Kontrolirleri Kurulu Ba5kanhgi 06510 Ankara/TURKEY MINISTRY OF ENERGY AND NATURAL RESOURCES GENERAL DIRECTORATE OF FOREIGN RELATIONS AND EU European Unioni Instrument For Pre- Accession Assistence(IPA) Energy Sector-Phase-I (TF16532-TR) STATEMENT OF CUMULATIVE INVESTMENTS As of December 31, 2017 and for the Year Then Ended (in USA Dolar) 1-INVESTMENTS Component Name Project Actualized Planned Variance Budget YTD Cumulative YTD Cumulative YTD Cumulative I- INVESTMENTS COSTS Component 1: Ministry of Energy and Natural Recources L520.000,00 1,078.404.82 2,489.289.46 1,109,116.36 2.520.000,00 -30.710.54 -30710,64 Acquis Alignement & institutional Capacity of MENR, UnbundUng of BOTAS and Visibility A Pubc Awareness (MENR-CS-Oi) 2 520 00000 1. 78.404.82 2 48928946 1 1"49 115.36 2.520 000.00 .30.710.54 -30710,54 Deloife Danqmanrk A.$ 2 52 000.00 - :Y8 404.82 2489 28946 1 1.115 36 2.520 000.00 -30.710.54 -30.710.54 Component 2: Natural Gas Market Development .194.80400 084.642.20 L194.38Z40 LO05.063.60 1994804.00 421.60 -421,60 Consuling Services for the Devolepment of Renewable Energy Soc-ar (MENR-CS.02) 2 194 04.00 2 084 642.20 2194 382.40 2 C85 0530 2.194804,00 421.60 421,60 Tema Plus Sri 2194804.00 2. DB4 642.20 2 194 382.40 2 05'! 063,80 2194 804.00 -421.60 421.60 Component 3: Renewable Energy Development 1.110.00000 210.000,00 1.110.000.00 210.000,00 i.ite0.0,o 0.00 0.00 Casing and implementabon Plan for The Gas Trading panbm rENH -V5- 3,I 1 110.000.00 210000.00 1110.000.00 210.00000 1110.000,00 0.00 0.00 Accenture Danrmanhk Ltd.$6 1 110.000,00 210 000.00 1 11000000 210000.00 1 110r000.00 0,00 0.00 Component 4: Energy Efficiency Promotion 4649.500,00 3.493.376.00 4.549453.001 3.493423.00i 4.649.600.001 47.00 -47.00 Techinical Assistance project Consulting Services For the nery efrry fME.qR-CS-G41 4 549 500.00 3 493 376 00 4549453.00 3 493 423.00 4.549500.00 47.00 47.00 MWH Ma4n Ma;. Ltd. $6i 4 549.500.00 3 4 93 376.00 4549453.00 349342300 4.549.500.00 47.00 47,00 Component 6: VisibilIty and Public Awareness 250.696.00 0.00 000 0 ozo 0.00 0.00 Contingencyfor Consultancy Contracts 250.696.00 0.00 0.00 0.00 0.00 0.00 000 TOTAL INVESTMENTS COSTS 10.625.000,00 0.860.423,02 10.343.124,a6 6.897,60416 10.374304,00 -31.179,14 -31.179r14 II. RECURRING COSTS A Financring Exendet.res 000 0.00 0,00 000 0.00 000 u00 0- Ganeral Management Exrand turps 00.00 000 0.00 0000 0000 0.00 0,00 C. Exchange Rate Differencel 0.00 000 0.00 000 0.00 0 00 000 TOTAL RECURRING COSTS I 0,00 0,00 0,00 0.00 0.00 0,00 0.00 PROJECT INVESTMENTS 104625.00j 6.066.43,021 10.343.124,8 6.897.76016 10a374A04,00 41179,14 -31.179,14 2- INVESTMENTS BY SUB-CATEGORIES Category Name Project Actualized Planned Varlnce Budget YTD Cumulative YTD Cumulative YTD Cumulative (1) Consultants' services 10.625.00000 8 s66.423.,02 10.343.124,6 6.897.602,16 10.374304,00 -31.179.14 -31.171,14 Acquis Afignement & institutionat Capacity of MENR, Ulnbundling of BOTAS and Visibility & PublicAwa reness MENRCSOdi V.520.000.00 1078.404.82 2.49 289 46 1 109.11536 2 520 000.00 -3071054 -30.710.54 DeloiteteDan,menitu A.$ 2.520 000,00 1078.404,82 2 49.289.4 1 109 115.38 2 520 000.00 -30710.54 -30710,54 Consulting Services for the Devolepment of Renewable 2.194904,00 2.084.642.20 2194.38240 2085 063,80 2194804,00 -42160 2160 Energy Sector fMENR-CS-02,J 2 , .1 080 Tema Plus Sri 2.194 804.00 2084642.20 2 194 382.40 2085063.80 2 194.804,00 -421,60 421.60 ng an mentation Plan for The Gas Trading1 110 .000,00 210.000 00 1 110 000.00 210 000.00 1 11000000 000 0 00 atform fMENR-CS-03J i____ Accenture Danimanlik Ltd.Sti 1 110000,00 210.000.00 1 110 000.00 210000.00 1 110000.00 0.00 0.00 Techinical Assistance project Consuting Services For 4.549L500,00 3.493.376 00 4 549.453.00 3 493.423,00 4 549.500,00 -4700 47 0 he EhergyEMftentcy (MEFNR-CS-04J' MIWH MIh. MU . Ltd. 5i 4 549 500.00 3.493.376,00 4549453.00 3 493 423.00 4 549.500,00 -47.00 4700 Con gnc for Consultanc Contracts 250.696.00 0.00 0.00 0.00 0.00 0,00 DX 10.s2000.0 t86,4202 10.343-14A 6a9760 ,18 10.374.34,00 -31.179.14 -31.17,14 11- RECUJRR1NG COSTS A- Financing Expenditures 0.00 000 000 000 000 0.00 0,00 B- General Management ExLcnditures 0.00 0 00J 0.00 000 0.00 0.00 0.00 C- Exchange Rate Differences 0.00 0,00 000 000 0.00 0.00 0,00 TOTAL RECURRING COSTS 0.00 0,00. 0,00 0,00 0,00 0.00 0,00 TOTAL 10.625.000.00 6.066.423,02I 10.343.124.6 6.697.602,16 10.374,900 -31.179l4 -31.178,14 SileyDnD MID BULUT Dai Ba*u V. �� � ��� ��� S � .� �� � � и > 8.8 $8. �8.$88 $ �i �_д$ $g 8 8 88 8888� о б т а �рΡ, а и о о й а о � и н и а • о а о� n�: co�i � т +д т т �: �: �: У У У У У У „ с V рΡ т � � д � F� � '7 л о 4 О Q, О О. 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Date Appl. No. 1) Consultant's Services Paid Payment 29.7.2017 MENR-IPA12-5 1.611.934,88 1.611.934,88 3.8-2017 11.9.2017 MENR-IPA12-6 1.835.053,44 1.835.053,44 15.9-2017 4.10.2017 MENR-IPA12-7 506.251,00 506.251,00 11-10-2017 29.11.2017 MENR-IPA12-8 1.291.613,76 1.291.613.76 5-12-2017 Sub total S.F44.853,08, 5.244.853,08, 11- REQUESTS PENDING REIMBURSEMENT Disbursement Categories Appl. Date Appl. No. 2) ConsultanCs Amount Date of Services Paid Payment 0,00 0,00 0.00 Sub total III- TOTAL AMOUNT REQUESTED 1) Consultant's Amount Services Paid 5.244.853,08 5.244.853.08 NOTES: No withdrawal request was made in the form of SOE during the year. M111* BULUT Dalm Baomm V MINISTRY OF ENERGY AND NATURAL RESOURCES GENERAL DIRECTORATE OF FOREIGN RELATIONS AND EU European Union/ instrument For Pre- Accession Assistence(IPA) Energy Sector-Phase-1 (TF1 6532-TR) SPECIAL ACCOUNT STATEMENT ACCOUNT NO: 57 82 52 78-5013-EUR AT ZIRAAT BANK For the Year Ended December 31, 2017 (In USA Dolar) Opening Balance 1.739.375,16 Reimbursements to SA 5.244.853,08 a) Advance 0,00 b) SOE Procedure 5.244.853,08 c) Summary Sheet 0,00 Refunds to Special Account 0.00 Available Funds 6.984.228,24 Payments Made for Expenditures 6.866.423,02 Service charges for the account 0,00 Total Project Investments 6.866.423,02 Closing Balance 117.805,22 Silleyman Milmin BULUT Daire Balkam V. REPUBLIC OF TURKEY MINISTRY OF ENERGY AND NATURAL RESOURCES GENERAL DIRECTORATE OF FOREIGN RELATIONS AND EU (Energy Sectore Programme Phase I Project) (TRUST FUND GRANT NUMBER TF016532) For The Year Then Ended on December 31, 2017 . OBJECTIVES AND STRUCTURE OF THE PROJECT/GRANT The objective of the Project is the enhancement of the Turkish energy sector in line with the EU Energy priorities and strategies in energy efficiency, renewable energy, and the natural gas market. The Project consists of the following parts: Part A. Ministry of Energy and Natural Resources Carry out the following in relationship to the Ministry of Energy and Natural Resources ("MENR"): (a) Institutional review and capacity building of MENR, including preparation of a report on identification of the existing methodologies used for energy forecasting and planning and a plan for MENR to establish a technical and administrative structure for the management of energy information system. (b) Review of the alignment of Turkey's legal and institutional framework for electricity, natural gas, energy efficiency and renewable energy with the EU's energy acquis, including identification of the main differences (gaps) between Turkey's legislation and its implementation and the EU acquis (including EU's third package of energy reforms) and carrying out gap analyses and regulatory impact assessments and cost/benefit analyses for each of the four regulatory areas to provide a basis for effective alignment. Part B. Natural Gas Market Development Carry out the following with respect to the development of the natural gas sector: (a) Provision of support for the unbundling of the national gas supply and transmission company BOTAS, including preparation of a study of main obstacles and bottlenecks for further liberalisation of the market, preparation of a study on ways and methods of establishing a transparent and non- discriminatory framework, formulation of measures to promote the market, and introduction of measures to protect customers. (b) Provision of support for the design of, and regulations for, a gas trading platform and a plan for effective gas market opening, including review of wholesale market opening and gas trading arrangements and volumes, and market participants' interest and capacity to operate on a gas trading platform, preparation of a detailed survey and a report of best practices, and preparation of a further need assessment report and technical and functional design of a gas trading platform software. IV. THE ACCOUNTING PRINCIPLES AND POLICIES WITH CHART OF ACCOUNTS AND FISCAL TABLES 1. Accounting Standard Applied The Chart of Accounts of the Project has been prepared on an "Accrual Basis" in accordance with the International Accounting Standards. However, the accounting procedures function on a "cash basis" in order to avoid exchange differences in investment expenditures and costs. 2. Accounting Basis The entire fiscal tables are prepared in accordance with the cash basis. In line with this basis, after the financial transactions and economic events took place, they are taken into accounting records when the cash or quasi cash assets have been collected or paid and are reflected to fiscal tables of the related period. 3. Currency Our accounting records are kept by applying real time exchange for both currencies, Turkish Lira and Euro which is the financial currency of the loan agreement signed between the World Bank and the Turkish Government. 4. Fixed Assets The fixed assets which have been purchased by the project resources are recorded in line with the costs on the procurement date, the project components and the expenditure categories. The amortization records related with the project assets are not carried out. 5. Exchange Transactions Euro and TL records of the utilization of the resources and funds, and the investment expenditures, the daily current exchange buying rate on the collection and payment date published by the TC Ziraat Bank, is taken into account. 6. Receivables The receivables are specified by net asset basis. Since the accounting system functions on a cash basis, the "receivables" are formulated by advance payments to the components and staff responsible. Advance payments in the period of arrangement of standard periodical reports by the World Bank are added to the related investment accounts. 7. Continuity The Project shall execute the activities by September 28, 2017 or another date which shall be negotiated between the World Bank and the Republic of Turkey. 3 VIII. THE PLANNED EXPENDITURES FOR THE CURRENT YEAR The Project has been completed. IX. DIFFERENCES BETWEEN THE REQUESTED AND PAID AMOUNTS UNDER THE SOE PROCEDURE No withdrawal application has been made in the review period. X. CORRECTION OF THE PREVIOUS YEAR'S FINANCIAL STATEMENTS No correction has been made for the previous year's financial statements. Stiley an Mlmin ULUT Head of Department 5