MUNICIPAL DEVELOPMENT FUND OF GEORGIA LOAN NO.8380-GE GRANT NO.TF018090 (SECOND REGIONAL AND MUNICIPAL NFRASTRUCTURE DEVELOPEMENT PROJECT) Special Purpose Project Financial Statements and Independent Auditor's Report For the Year Ended 31 December 2015 iK iW Ci MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPEMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 TABLE OF CONTENTS Page STATEMENT OF MANAGEMENTS 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 YEAR ENDED 31 DECEMBER 2015: Summary of sources and uses of funds 4-5 Statement of financial position 6 Summary of expenditure by activity 7 Statement of expenditure ("SOE") 8 Statements of designated account 9-10 Notes to the special purpose project financial statements 11-15 a I FR MUNICIPAL DEVELOPMENT FUND OF GEORGIA STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 Management of the Second Regional Development and Municipal Infrastructure Development Project (the "Project), financed under the Loan Agreement No. 8380-GE dated 18 August 2014 and Grant Agreement No. TF018090 dated 1 May 2015, implemented by the Municipal Development Fund of Georgia ("MDF") is responsible for the preparation of the special purpose project financial statements that present fairly the project's statement of financial position as at 31 December 2015, the summary of sources and uses of funds, summary of expenditure by activity, statement of expenditure ("SOE") and designated account statements, in compliance with the basis of accounting described in Note 2 of accompanying these special purpose project financial statements 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 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; * 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 year ended 31 December 2015 were authorised for issue on 6 June 2016 by the Management. On behalf of Management: Juansher Burchuladz& - Natalie God#ashvili Executive Director < . Head of Findrcial Management and Investments Unit 6 June 2016 6 June 2016 Deloitte. D e lo tte .Deloitte & Touche LLC 36 a Lado Asatiant Street Tbilisi, 0105 Georgia Tel: +995 32 224 45 66 Fax: +995 32 224 45 69 www.deloitte.ge INDEPENDENT AUDITOR'S REPORT To the management of the Municipal Development Fund of Georgia: We have audited the accompanying special purpose project financial statements of the Second Regional and Municipal Infrastructure Development Project (the "Project") financed under the Loan Agreement No. 8380-GE dated 18 August 2014 and Grant Agreement No. TF018090 dated 1 May 2015, implemented by the Municipal Development Fund of Georgia, which comprise the project's statement of financial position as at 31 December 2015, the summary of sources and uses of funds, summary of expenditure by activity, statement of expenditure ("SOE") and designated account statements for the year ended 31 December 2015 and a summary of significant accounting policies and other explanatory notes (collectively referred to as the "special purpose project financial statements'). The special purpose project financial statements are prepared by management of the Municipal Development Fund of Georgia 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. 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 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 the special purpose financial statements that are free from material misstatement, whether due to fraud or error. Auditor's 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 the auditor's 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, the auditor considers internal control relevant to the Project's preparation and fair presentation 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 Project'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. Deloitte refers to one or more of Deloitte Touche TohmatLsu Limited, a LK prIvate company Inmited by guarantee? (UTTL ), its network of memberfirms, and their related entilies DTTL and each of its member firms are legaly separate and independent entities DTTL talso referred to as Deloitte Globar) does not provide services to cients. Please see www deloitte com/about for a more detailed description of DTTL and its member firms Please see htp //www2.deloitte com/ge/en/pages/about-deloittelarticeslabout-deloitte.htmIl for a detailed description of the legal structure of Deloitte, Georgia. © 2016 Deloitte & Toucre LLC All rights reserved Deloitte. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying special purpose financial statements of the Project for the year ended 31 December 2015 are prepared, in all material respects, in accordance with the basis of accounting described in Note 2 and in conformity with the World Bank's Guidelines. Basis of accounting and restriction on distribution and use Without modifying our opinion, we draw attention to Note 2 to the special purpose project financial statements, which describe the basis of accounting. The special purpose project financial statements are prepared to assist the Project to comply with the requirements of International Bank for Reconstruction and Development. As a result, the special purpose project financial statements may not be suitable for another purpose. Our report is intended solely for use by the management of the Project, the Government of Georgia and International Bank for Reconstruction and Development and should not be distributed or used by anyone other than these specified parties. Other matter These special purpose financial statements for the year ended 31 December 2014 were audited by another auditor who expressed an unmodified opinion on those statements on 30 June 2015. 6 June 2016 Tbilisi, Georgia t MF MUNICIPAL DEVELOPMENT FUND SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPEMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 STATEMENT OF SOURCES AND USES OF FUNDS FOR THE YEAR ENDED 31 DECEMBER 2015 (in US Dollars) Actual Planned Variance Cumulative as Cumulative as Year ended at Year ended Cumulative as Year ended at PAD Life of the 31.12.2015 31.12.2015 31.12.2015 at 31.12.2015 31.12.2015 31.12.2015 project Unaudited Unaudited Unaudited Unaudited Unaudited OPENING WORKING CAPITAL Cash 1,052,718 - Prepayments 795,797 Payables 1,848,515 - SOURCES OF FUNDS IBRD Loan 8380-GE 5,821,904 7,896,904 30,000,000 SDC Funds 400,000 400,000 5,000,000 Government of Georgia 1,226,791 1,227,732 2,250,000 MDF Funds 2,531,501 2,531,501 12,925,000 Municipal Funds 2,306,659 2,495,533 8,760,000 Other income 14,357 14,357 TOTAL 12,301,212 14,566,027 58,935,000 EXPENDITURE Works and goods (part A. 1(a) & partAl (b)) 8,673,514 8,998,485 8,108,917 8,433,888 (564,597) (564,597) 47,610,000 Consultants service and training, and 10C under part A.2 906,498 911T178 1,000,000 1,004,680 93,502 93,502 2,500,000 Goods, consultants, training under Part B - - - - - - 8,750,000 Front-end fee - 75,000 - 75,000 - - 75,000 TOTAL 9,580,012 9,984,663 9,108,917 9,513,568 (471,095) (471,095) 58,935,000 4 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPEMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 STATEMENT OF SOURCES AND USES OF FUNDS FOR THE YEAR ENDED 31 DECEMBER 2015 (CONTINUED) (in US Dollars) Foreign exchange loss (421,508) (433,157) CLOSING WORKING CAPITAL Cash 1,988,480 1,988,480 Prepayments 1,067,556 1,067,556 Receivables from Municipalities 1,482,812 1,482,812 Other Assets 328 328 Payables (390,969) (390,969) TOTAL 4,148,207 4,148,207 - On behalf of Management: Juansher Burchuladze Natalie Godziashvili Executive Director / Head of Financial Management and Investments Unit 6 June 2016 6 June 2016 The notes on pages 11 to 15 form an integral part of these special purpose project financial statements. 5 MUNICIPAL DEVELOPMENT FUND SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPEMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 STATEMENT OF FINANCIAL POSITION FOR THE YEAR EDNED 31 DECEMBER 2015 (in US Dollars) 31 December 31 December Note 2015 2014 ASSETS Cash 8 1,988,480 1,052,718 Prepayments 7 1,067,556 795,797 Receivables from Municipalities 1,482,812 - Other assets 328 - TOTAL ASSETS 4,639,176 1,848,515 LIABILITIES Payables (390,969) - Total liabilities (390,969) - NET ASSETS 4,148,207 1,848,515 Cumulative funds received: IBRD Loan 8380-GE 7,896,904 2,075,000 SDC Grant 400,000 - Government of Georgia 1,227,732 941 MDF Funds 2,531,501 - Funds from Municipalities 2,495,533 188,874 Other Income 14,357 - Total funds received 14,566,027 2,264,815 Cumulative expenditures: Cumulative project expenditures: 9 9,984,663 404,651 9,984,663 404,651 Foreign exchange loss (433,157) (11,649) TOTAL NET ASSETS 4,148,207 1,848,515 On behalf of Management: Juansher Burchula#e,/ Natalie Godziash)/ili Executive Director Head of Financial Management and Investments Unit 6 June 2016 6 June 2016 The notes on pages 11 to 15 form an integral part of these special purpose project financial statements. i-W 1-1 MUNICIPAL DEVELOPMENT FUND SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPEMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 STATEMENT OF EXPENDITURE BY ACTIVITIES FOR THE YEAR EDNED 31 DECEMBER 2015 (in US Dollars) Actual Planned Variance Project activities Year Cumulative as Year Year Cumulative as ended at ended Cumulative as ended at 31.12.2015 31.12.2015 31.12.2015 at 31.12.2015 31.12.2015 31.12.2015 Unaudited Unaudited Unaudited Unaudited Part A: Infrastructure investment A.1(a) Provision of financing on a credit basis 5,788,134 5,788,134 5,200,000 5,200,000 (588,134) (588,134) A.1(b) Provision of financing on a grant basis 2,885,380 3,210,351 2,908,917 3,233,888 23,537 23,537 A.2.Technical assistance for Investment Subprojects 906,498 911,178 1,000,000 1,004,680 93,502 93,502 Part B: Institutional development B.1 Improving the institutional capacity and performance of LSGs - - - - B.2 Improving the institutional capacity and performance of MDF - - - - Front end fee . 75,000 - 75,000 TOTAL EXPENDITURES 9,580,012 9,984,663 9,108,917 9,513,568 (471,095) (471,095) On behalf of Management: Juansher Burcfiuladze Natalie Godziaivili Executive Director Head of Financial Management and Investments Unit 6 June 2016 6 June 2016 The notes on pages 11 to 15 form an integral part of these special purpose project financial statements. 7 MUNICIPAL DEVELOPMENT FUND SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPEMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 STATEMENT OF EXPENDITURE (SOE) FOR THE YEAR EDNED 31 DECEMBER 2015 (in US Dollars) Category 2: Consultants service, training Withdrawal Category la: Category and Incremental application Works and 1 b: Works operating costs Withdrawal No. date Total SOE Goods and Goods under Part A2 2 14.05.2015 726,235 336,892 385,565 3,778 3 17.06.2015 1,023,013 485,167 522,291 15,555 4 22.09.2015 1,291,525 738,207 504,905 48,413 5 09.12.2015 1,729,214 848,597 848,072 32,545 4,769,987 2,408,863 2,260,833 100,291 USD 66,559 under withdrawal application No. 4 is attributable to 2014. On behalf of Management: Juansher Burchulad(e Natalie Goqiiashvili Executive Director Head of Financial Management and Investments Unit 6 June 2016 6 June 2016 The notes on pages 11 to 15 form an integral part of these special purpose project financial statements. MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPEMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 STATEMENT OF DESIGNATED ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2015 (in US Dollars) Account No. 202250160 Depository Bank State Treasury Address 16 V. Gorgasali street Tbilisi, 0114 Georgia Opening balance 973,487 Funds received from IBRD (Loan) 5,821,904 Present outstanding amount advanced to Designated Account ("DA") 6,795,391 DA closing balance as at 31 December 2015 8 1,458,745 Add: Amount of eligible expenditures paid 5,336,646 Total advance accounted for 6,795,391 4i On behalf of Management: Juansher Burchula e Natalie Godziahvili Executive Director Head of Financial Management and Investments Unit 6 June 2016 6 June 2016 The notes on pages 11 to 15 form an integral part of these special purpose project financial statements. 9 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPEMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 STATEMENT OF DESIGNATED ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2015 (CONTINUED) (in US Dollars) Account No. 202230160 Depository Bank State Treasury Address 16 V. Gorgasali street Tbilisi, 0114 Georgia Opening balance Funds received from IBRD (Grant) 400,000 Present outstanding amount advanced to DA 400,000 DA closing balance as at 31 December 2015 8 382,281 Add: Amount of eligible expenditures paid 17,719 Total advance accounted for 400,000 On behalf of Management: Juansher Burchulado Natalie Godzia0vili Executive Director Head of Financial Management and Investments Unit 6 June 2016 6 June 2016 The notes on pages 11 to 15 form an integral part of these special purpose project financial statements 10 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPEMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (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. 8380-GE (the "Agreement") in the amount of 30 million United States Dollars ("USD") was signed between the Government of Georgia ("GoG") and international Bank for Reconstruction and Development ("IBRD") on 18 August 2014 ("inception"). Swiss Grant Agreement No. TF018090 (the "Agreement") in the amount of 5 million United States Dollars ("USD") was signed between the Government of Georgia ("GoG") and International Bank for Reconstruction and Development ("IBRD") on 1 May 2015. The main objectives of the loan are: providing finance on the credit and grant basis to selected Local self governments ("LSG") to finance investment sub-projects related to municipal services; preparation of feasibility studies, construction supervision, monitoring and evaluation activities for investment subprojects; enhancing the institutional capacity and performance of LSGs and MDF. 2. ACCOUNTING POLICIES Basis of accounting- These special purpose project financial statements have been prepared in accordance with the Modified Accrual Basis of Accounting and incorporate the following principal accounting policies, which have been consistently followed in all material respects and 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. 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 The 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. 11 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPEMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (CONTINUED) (in US Dollars) 4. BASIS OF FUNDING According to the terms of the Agreement, expenditure is co-financed by proceeds received from IBRD, Swiss Grant, the Government of Georgia ("GoG"), MDF and Municipalities. The financing is provided from the following sources: Goods and Works under part A.1 - IBRD, MDF and Municipalities: 40%,40% and 20%, resepectively; Goods and Works under part A.2 - IBRD and Municipalities: 85% and 15%, resepectively; Consultants' services, training under Part A.3 of the Project and Incremental Operating Costs - IBRD and GoG: 80% and 20%, respectively; Goods, consultants' services and training under Part B of the Project - IBRD, Swiss Grant and GoG: 22.8%, 57.2% and 20%, respectively. Swiss Municipal IBRD Grant GoG MDF ities Total Goods and Works under part A.1 12,925,000 - - 12,925,000 6,465,000 32,315,000 Goods and Works under part A.2 13,000,000 - - - 2,295,000 15,295,000 Consultants' services, training under Part A. 3 of the Project and Incremental Operating Costs 2,000,000 - 500,000 - - 2,500,000 Goods, consultants' services and training under Part B of the Project 2,000,000 5,000,000 1,750,000 - 8,750,000 Front-end fee 75,000 - - - - 75,000 Total: 30,000,000 5,000,000 2,250,000 12,925,000 8,760,000 58,935,000 5. METHODS OF WITHDRAWAL The methods of withdrawal used from the inception of the loan to 31 December 2015 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 authorised 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. 12 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPEMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (CONTINUED) (in US Dollars) 6. STATEMENT OF EXPENDITURE Withdrawals are to be made on the basis of SOEs for expenses on contracts within the following contractual limits: 6 (i) All expenditures for works valued at less than USD 4,000,000; (1i) Consultant services contracts (firms) valued at less than USD 200,000; (iii) Consultant services contracts (individuals) valued at less than USD 50,000; (iv) All expenditures for goods valued at less than USD 300,000; 7. PREPAYMENTS 31 December 31 December 2015 2014 Advances to contractors 1,067,556 795,797 Total: 1,067,556 795,797 Payments of advances to contractors are made at the beginning of the contract in amount of 10%- 30% of total contract amount. Retention of advance is done periodically upon submission of works completed certificates by contractors. 8. CASH 31 December 31 December 2015 2014 Balance on designated account 1,841,026 973,487 Local account 147,454 79,231 Total: 1,988,480 1,052,718 13 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPEMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (CONTINUED) (in US Dollars) 9. PROJECT EXPENDITURE BY FUND Actual Year to cumulative to Project activities date date Works and Goods under Part A.1 2,393,911 2,393,911 Works and Goods under Part A.2 2,452,319 2,728,545 Consulting services and training 709,142 712,886 Front-end fee - 75,000 IBRD TOTAL 5,555,372 5,910,342 Works and Goods under PartA.1 Works and Goods under Part A.2 - - Consulting services and training 17,772 17,772 GRANT TOTAL 17,772 17,772 Works and Goods under Part A.1 568,188 568,188 Works and Goods under Part A.2 70,283 70,283 Consulting services and training 179,584 180,520 GoG TOTAL 818,055 818,991 Works and Goods under PartA.1 2,245,336 2,245,336 Works and Goods under Part A.2 Consulting services and training - - MDF TOTAL 2,245,336 2,245,336 Works and Goods under PartA.1 580,699 580,699 Works and Goods under PartA.2 362,778 411,523 Consulting services and training - - MUNICIPALITIES TOTAL 943,477 992,222 TOTAL PROJECT EXPENDITURES 9,580,012 9,984,663 The Project consists of the following main components: Component 1 - Infrastructure Investment * Provision of financial resources to local self-governments to carry out investment sub-projects 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. * Provision of financial resources to local self-governments to carry out Investment Subprojects for public infrastructure to attract private sector investments in tourism and agro-processing 14 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPEMENT PROJECT LOAN NO.8380-GE GRANT NO.TF01 8090 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in US Dollars) 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 * Performance monitoring and evaluation activities 10. COMMITMENTS AND CONTINGENCIES Management is not aware of any commitments and contingencies which would have a material impact on the special purpose project financial statements as at 31 December 2015 and on the funds received and disbursed during the year then ended. 11. 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 and 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. Throughout 2015 Georgia's neighbouring countries, which are large trading partners of Georgia, have experienced significant political and economic turmoil which has had a knock-on effect on the Georgian economy. This has resulted in a significant devaluation of the Georgian Lari against the US dollar and other major currencies. 12. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE There were no significant events subsequent to the balance sheet date. 13. APPROVAL OF FINANCIAL STATEMENTS These special purpose projects financial statements were authorised for issue by the Management of MDF on 6 June 2016. 15