Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized

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1 Public Disclosure Authorized Public Disclosure Authorized SECOND NATIONAL WATER SUPPLY AND SANITATION PROJECT AND ADDITIONAL FINANCING STATE AMELIORATION AND WATER MANAGEMENT OPEN JOINT STOCK COMPANY INTERNATIONAL DEVELOPMENT ASSOCIATION CREDIT No AZ. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No 7518 AZ. AND LOAN No.8381 AZ REPORT OF INDEPENDENT AUDITORS AND SPECIAL PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 Public Disclosure Authorized Public Disclosure Authorized

2 SECOND NATIONAL WATER SUPPLY AND SANITATION PROJECT AND ADDITIONAL FINANCING INTERNATIONAL DEVELOPMENT ASSOCIATION CREDIT No AZ INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN No 7518 AZ AND LOAN No.8381 AZ CONTENTS Page Statement of Management Responsibilities 3 Report of Independent Auditors 4-5 Balance Sheet 6 Statement of Sources and Uses of Funds 7-8 Statement of Project Activities 9 Statement of Special and Project Accounts Notes to the Special Purpose Financial Statements 12-18

3 STATEMENT OF MANAGEMENT RESPONSIBILITIES Management has prepared and is responsible for the special purpose financial statements and related notes of the Second National Water Supply and Sanitation Project and Additional Financing (the "Project") financed by the International Development Association Credit No AZ, International Bank for Reconstruction and Development Loan No AZ, International Bank for Reconstruction and Development Loan No AZ and the Government of Azerbaijan. They have been prepared in accordance with the basis of accounting described in Note 2 of the accompanying special purpose financial statements. The Project maintains internal accounting control systems and related policies and procedures designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorisation and properly recorded, and that accounting records may be relied upon for the preparation of financial statements and other financial information. The system contains self-monitoring mechanisms that allow management to be reasonably confident that controls, as well as the Project's administrative procedures and internal reporting requirements operate effectively. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error or the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statements preparation. MAHAMMAD ABDULLAYEV PROJECT IMPLEMENTATION UNIT HEAD NATIG MAMMADOV FINANCE MANAGEMENT SPECIALIST Baku, Republic of Azerbaijan 29 June

4 MOORE STEPHENS Moore Stephens Azerbaijan limited 13, Zeynalabdin Taghiyev Street Baku AZ100S, Azerbaijan /48/ so REPORT OF INDEPENDENT AUDITORS TO THE MANAGEMENT OF THE SECOND NATIONAL WATER SUPPLY AND SANITATION PROJECT AND ADDITIONAL FINANCING 1. We have audited the accompanying special purpose financial statements of the Second National Water Supply and Sanitation Project and Additional Financing (the "Project") implemented by the State Amelioration and Water Management Open Joint Stock Company which comprise the balance sheet as of 31 December 2014, statement of sources and uses of funds, statement of project activities and statement of special and project accounts for the year then ended and a summary of significant accounting policies and other explanatory notes. We have also audited the Project's compliance with the conditions of the relevant Credit and Loan Agreements, the World Bank guidelines and Laws of the Azerbaijan Republic. Management's responsibility for the financial statements 2. Management is responsible for the preparation and fair presentation of these special purpose financial statements in accordance with the basis of accounting described in Note 2 of the accompanying special purpose financial statements. This responsibility includes: designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors' responsibility 3. Our responsibility is to express an opinion on these special purpose financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing ("ISA") applicable to the audit of financial statements and to compliance auditing, with special reference to ISA 800 "The Independent Auditor's Report on Special Purpose Audit Engagements" and to the relevant Credit Agreement, the World Bank guidelines and Laws of the Azerbaijan Republic. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the special purpose financial statements are free from material misstatement and about whether the Project has complied with the conditions of the relevant agreements, guidelines, laws and regulations. 4. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the 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 entity's internal control. An aud it 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 financial statements. 5. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. ',. ~ 4

5 MOORE STEPHENS Opinion 6. In our opinion: a) the accompanying special purpose financial statements referred to above, present fairly, in all material respects, the financial position of the Project as of 31 December 2014, and related sources and uses of funds and project activities and movement in the of accounting described in Note 2 to the accompanying special purpose financial statements; and b) the Project is, in all material respects, in compliance with the conditions of the relevant Credit and Loan Agreements, the World Bank guidelines and Laws of the Republic of Azerbaijan during the year ended 31 December June

6 IDA CREDIT AZ., IBRD LOAN 7518 AZ AND IBRD LOAN 8381 AZ BALANCE SHEET AS OF 31 DECEMBER 2014 (Expressed in US dollars) Note ASSETS AND CUMULATIVE EXPENDITURE Cash at bank Cumulative Project expenditure 3 1,037, ,090,066 3,078, ,435, ' 127, ,514,384 SOURCES OF FUNDS Project financing Accumulated foreign exchange difference 337,140,892 (13,820} 259,521,805 {7,421} 337,127, ,514,384 A..(. MAHAMMAD ABDULLAYEV PROJECT IMPLEMENTATION UNIT HEAD NATIG MAMMADOV FINANCE MANAGEMENT SPECIALIST The notes set out on pages form an integral part of these financial statements 6

7 STATEMENT OF SOURCES AND USES OF FUNDS (Expressed in US dollars) Note 2014 OPENING BALANCES IDA* Credit AZ 991,306 IBRD.. Loan 7518 AZ 2,063,319 I BRD Loan 8381 AZ Government of Azerbaijan (GoA) 23,902 Other sources (tender fees) 3,078,527 ADD: FUNDS RECEIVED BY SOURCES IDA Credit AZ 4 1,508,729 IDA Credit AZ (Direct Payments) 666,440 IBRD Loan 7518 AZ (Initial deposit) 4 2,827,073 IBRD Loan 7518 AZ (Direct Payments) 43,464,620 IBRD Loan 8381 AZ 4 375,000 Government of Azerbaijan 28,777,225 Other (tender fees) LESS: Refund of unused GoA share 77,619,087 ADD/ (LESS):EXCHANGE DIFFERENCE IDA Credit AZ (490) IBRD Loan 7518 AZ {5,062) IBRD Loan 8381 AZ Government of Azerbaijan (847) Other (tender fees) (6,399} LESS: EXPENDITURE IDA Credit AZ Consulting services 2,718,508 Incremental operating costs 371,855 Transfer fee for IDA funds 3,090,363 IBRD Loan 7518 AZ Goods 47,521,794 Front end Fee 47,521,794 IBRD Loan 8381 AZ Front end Fee 375, ,000 Government of Azerbaijan Goods 26,986,349 Consulting services 1,551,143 Incremental operating costs 129,560 Other sources (tender fees) Incremental operating costs 28,667,052 TOTAL EXPENDITURE 79,654,209 *International Development Association **International Bank for Reconstruction and Development ,324,530 1,393,057 15, ,733,037 2,993,310 5,795,073 30,555,676 22,516,107 61,860,166 (70, 142) 65,952 (3,447) (7,637} 2,841, ,581 3,256,527 35,746,439 35,746,439 20,748,595 1,627, ,140 22,504,073 61,507,039 Cumulative 13,856,857 1,398,363 21,327, ,112, , ,981,074 99, ,151,342 10,450 10,450 (27,983) 17,779 (4,026) 410 (13,820l 13,118,250 2,057, ,175, ,222, , ,606, , , ,610,495 7,501, , ,833, , , ,090,066 The notes set out on [Jages form an integral [Jar! of these financial statements 7

8 IDA CREDIT AZ., IBRD LOAN 7518 AZ. AND IBRD LOAN 8381 AZ. STATEMENT OF SOURCES AND USES OF FUNDS (CONTINUED) (Expressed in US dollars) Note Cumulative CLOSING BALANCES IDA Credit AZ 3 75,622 IBRD Loan 7518 AZ 3 828,156 IBRD Loan 8381 AZ 3 Government of Azerbaijan 3 133,228 Other sources (tender fees) 3 1,037, ,306 2,063,319 23,902 3,078,527 Mot MAHAMMAD ABDULLAYEV PROJECT IMPLEMENTATION UNIT HEAD NAT G MAMMADOV FINANCE MANAGEMENT SPECIALIST The notes set out on pages form an integral part of these financial statements 8

9 STATEMENT OF PROJECT ACTIVITIES (Expressed in US dollars) Cumulative Component A Rayon Investment A.1 Main Investments A.2 Consultant Services 74,508,143 4,237,825 56,495,034 4,469, ,825,206 20,523,353 78,745,968 60,964, ,348,559 Component C. Project implementation management and 533, ,721 2,983,178 Component Front end Fee 375, ,329 79,654,209 61,507, ,090,066 AP- MAHAMMAD ABDULLAYEV NAT MAMMADOV PROJECT IMPLEMENTATION UNIT HEAD FINANCE MANAGEMENT SPECIALIST The notes set out on pages form an integral part of these financial statements 9

10 STATEMENT OF SPECIAL AND PROJECT ACCOUNTS (Amounts are expressed in US dollars unless otherwise indicated) For the Year ended 31 December 2014 Special Special Project IBRD IBRD Account Account Account (USD) (AZN) IDA (USD) IDA (AZN) GOA Opening balance 986,816 4,490 2,048,039 15,280 23,902 ADD: Project funds received 1,508,730 2,827,073 28,777,225 Converted from IDA USD Account (Other source) 1,067,296 Converted from USD Account (IBRD) 4,047,597 2,495,546 1,071,786 4,875,112 4,062,877 28,801,127 LESS: Eligible Project expenditure (IDA Share) 1,357,582 1,066,428 4,060,821 Eligible Project expenditure (IBRD Share) 12 28,667,052 Converted into AZN Account (IDA share) 1,067,700 Converted into AZN Account (IBRD) 4,049,000 2,425,282 1,066,428 4,049,012 4,060,821 28,667,052 Foreign exchange - Gain/(Loss) IDA IBRD GOA {84 7 ~ (847) Closing balance IDA share 70,264 5,358 IBRD 826,100 2,056 GOA 133,228 70,264 5, ,100 2, ,228..c,.t.t. MAHAMMAD ABDULLAYEV PROJECT IMPLEMENTATION UNIT HEAD ~7 AMMADOV FINANCE MANAGEMENT SPECIALIST The notes set out on pages form an integral part of these financial statements 10

11 STATEMENT OF SPECIAL AND PROJECT ACCOUNTS (CONTINUED) (Amounts are expressed in US dollars unless otherwise indicated) For the year ended 31 December 2013 Special Special Project IBRD IBRD Account Account Account (USD) (AZN) IDA (USD) IDA (AZN) GOA Opening balance 1,324, ,392, ,315 ADD: Project funds received 2,993,310 5,795,074 22,516,107 Converted from USD Account (IDA Share) 1,002, ,001 Converted from USD Account (IBRD) 201,121 5,208,959 4,518,961 1,002,570 7,477,579 5,209,512 22,531,422 LESS: Eligible Project expenditure (IDA Share) 2,238, ,080 13,419 Eligible Project expenditure (IBRD Share) 5,194,232 Eligible Project expenditure (GOA) 22,504,073 Converted into AZN Account (IDA share) 1,293,580 Converted into AZN Account (IBRD) 5,416,121 3,532, ,080 5,429,540 5,194,232 22,504,073 Foreign exchange - Gain/( Loss) IDA IBRD GOA {3,447} (3,447) Closing balance IDA share 986,816 4,490 IBRD 2,048,039 15,280 GOA 23, ,816 4,490 2,048,039 15,280 23,902 A.J.A.. MAHAMMAD ABDULLAYEV PROJECT IMPLEMENTATION UNIT HEAD AMMADOV CE MANAGEMENT SPECIALIST The notes set out on pages form an integral part of these financial statements 11

12 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS (Amounts are expressed in US dollars unless otherwise indicated) 1. BACKGROUND The objective of the Project is to improve the availability, quality, reliability and sustainability of water supply and sanitation services of the Borrower. According to the signed Agreements the Project consists of the following parts: Part A: Rayon Investment 1. Rehabilitation an extension of water supply and sewerage systems. As well as facilities for water, wastewater and sludge treatment in the Selected Rayons in the State Amelioration and Water Management Open Joint Stock Company's (SAWMC) Service Areas. 2. Rehabilitation an extension of water supply and sewerage systems. As well as facilities for water, wastewater and sludge treatment in the Selected Rayons in the State Amelioration and Water Management Agency of Nakhchivan Autonomous Republic's (SAWMA) Service Areas. Part B: Institutional Modernisation 1. Capacity building and modernisation of the SAWMC, through (a) the provision of training for management, financial management, customer service, procurement, preventive maintenance and other subjects pertinent to effective and efficient management of the utilities; (b) development of performance monitoring, preventive maintenance and leak detection and repair; and (c) design and technical support for construction management, including procurement support and contract supervision for the investments. 2. Capacity building and modernisation of the SAWMA, through (a) the provision of training for management, financial management, customer service, procurement, preventive maintenance and other subjects pertinent to effective and efficient management of the utilities; (b) development of performance monitoring, preventive maintenance and leak detection and repair; and (c) design and technical support for construction management, including procurement support and contract supervision for the investments. Part C: Project Management I. Strengthening of the management capacity of the SAWMC to monitor and administer implementation of the Project, including audit. 2. Strengthening of the management capacity of the SAWMA to monitor and administer implementation of the Project, including audit. a) Financing Agreement with the IBRD Loan 7518-AZ. A Loan Agreement 7518-AZ dated 16 October 2009 has been signed between the Republic of Azerbaijan ("Borrower") and the International Bank for Reconstruction and Development ("IBRD"). The IBRD agrees to lend to the Borrower, on the terms and conditions set forth or referred to in this Agreement, the amount of two hundred thirty million Dollars (US$ 230,000,000), as such amount may be converted from time to time through a Currency Conversion in accordance with the provisions of Section 2.07 of the Loan Agreement to assist in financing the project described in Schedule I to the Agreement. SAWMC Subsidiary Agreement To facilitate the carrying out of the SAWMC's Respective Part of the Project the Borrower shall make part of the proceeds of the Loan available to the SAWMC under a subsidiary agreement between the Borrower and the SAWMC, under terms and conditions agreed by the IBRD ("SAWMC Subsidiary Agreement"). 12

13 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) (Amounts are expressed in US dollars unless otherwise indicated) 1. BACKGROUND (CONTINUED) Withdrawal of Loan Proceeds 1. The Borrower may withdraw the proceeds of the Loan in accordance with the provisions of Article II of the General Conditions, this Section and such additional instructions as the IBRD shall specify by notice to the Borrower (including the "World Bank Disbursement Guidelines for Projects' dated May 2006, as revised from time to time by the IBRD and as made applicable to this Agreement pursuant to such instructions), to finance Eligible Expenditure as set forth in the table below. 2. The following table specifies the categories of Eligible Expenditure that may be financed out of the proceeds of the Loan ("Category"), the allocation of the amounts of the Loan to each Category and the percentage of expenditure to be finances for Eligible Expenditure in each Category. ~ '!lj.'l. ~em;p :!Eli} frot.iof!l {i1 HI itlli "lll!liro I~(!J.II~ :tt.[ij. ;"j(tiil)~~ (1) Works (a) For Part A.1 of Project 670,000 75% (b) For Part A.2 of Project 330,000 (2) Goods (a) For Part A.1 and 8.1 of the Project. 139,645,000 75% (b) For Part A.2 and 8.2 of the Project. 68,780,000 Amount payable pursuant to Section 2.03 of this Agreement in accordance with (3) Front-end Free 575,000 Section 2.07 (b) of the General Conditions (4) Premia for Interest Rate Caps and Interest Rate Amount due under Section 2.07 (c) of this Collars - Agreement (5) Unallocated 20,000,000 - TOTAL AMOUNT 230,000,000 b) Financing Agreement with the IDA Credit AZ. A Credit Agreement AZ dated 16 October 2009 has been signed between the Republic of Azerbaijan ("Recipient") and International Development Association ("Association" or "IDA'). The Association agrees to extend to the Recipient, on the terms and conditions set forth or referred to in the Agreement, a credit in an amount equivalent to eighteen million eight hundred thousand Special Drawing Rights (SDR 18,800,000), (variously "Credit" and "Financing") to assist in financing the project described in Schedule I to the Agreement. - 13

14 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) (Amounts are expressed in US dollars unless otherwise indicated) 1. BACKGROUND (CONTINUED) Withdrawal of the Proceeds of the Financing The following table specifies the categories of Eligible Expenditure that may be financed out of the proceeds of the Financing ("Category"), the allocation of the amounts of the Financing to each Category and the percentage of expenditures to be financed for Eligible Expenditure in each Category. ~... IJU l;.t IIO\:li1f:l.,:.. 10/ -::'11, Ill ICI ~ I~IIO I{Tfl:11 ll!1lro'!"~ :lf:t~ ~ ~~ (1) Works for Part A.2 of the Project 251,000 75% (2) Goods (a)for Part A.1 and B.1 of the Project 7,474,000 75% (b) For Part A.2 and B.2 of the Project 3,681,000 (3) Consultant's Services, including Audit and Training 3,779,000 75% (a) for Parts A.1, B.1 and C.1 of the Project (b) for Parts A.2,B.2 and C.2 of the Project 1,861,000 (4) Incremental Operating Costs (a) for Parts A.1, B.1 and C.1 of the Project 336,000 75% (b) for Parts A.2,B.2 and C.2 of the Project 165,000 (5) Unallocated 1,253,000 - TOTAL AMOUNT 18,800,000 Counterpart financing, as stipulated by the Agreement, is to be provided by the Government of Azerbaijan. c) Financing Agreement with the IBRD Loan 8381-AZ A Loan Agreement 8381-AZ dated 22 October 2014 has been signed between the Republic of Azerbaijan ("Borrower'') and the International Bank for Reconstruction and Development ("IBRD"). The IBRD agrees to lend to the Borrower, on the terms and conditions set forth or referred to in this Agreement, the amount of one hundred fifty million Dollars (US$ 150,000,000), as such amount may be converted from time to time through a Currency Conversion in accordance with the provisions of Section 2.07 of the Loan Agreement to assist in financing the project described in Schedule I to the Agreement. (1) Goods, works, non-consulting services, and consultants' services, Training, and Incremental 0 eratin Costs for the Pro ect (2) Front-end-Fee (3) Interest Rate Cap or Interest Rate Collar premium TOTAL AMOUNT 149,625, , ,000,000 75% Amount payable pursuant to Section 2.03 of the Loan Agreement in accordance with Section 2.07 (b) of the General Conditions Amount due pursuant to Section 2.07(c) of the Loan A reement 14

15 IDA CREDIT AZ., IBRD LOAN 7518 AZ AND IBRD LOAN 8381 AZ NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) (Amounts are expressed in US dollars unless otherwise indicated) 2. ACCOUNTING POLICIES These special purpose financial statements cover the part of the project implemented by the State Amelioration and Water Management OJSC. Transactions related to the part of the project implemented by the State Amelioration and Water Management Agency of Nakhchivan Autonomous Republic have been excluded. a) Basis of Accounting These special purpose financial statements are prepared in accordance with the International Public Sector Accounting Standard ("IPSAS") Financial Reporting under the Cash Basis of Accounting issued by the International Public Sector Accounting Standards Board ("IPSASB"), an independent standard-setting body within the International Federation of Accountants ("IFAC") and incorporate the following principal accounting policies, which have been consistently followed in all material respects and comply with the "Guidelines: Annual Financial Reporting and Auditing for World Bank - Financed Activities" issued by the World Bank's Financial Management Sector Board. These Special Purpose Financial Statements have been prepared under the historical cost convention. Project financing is recognised as a source of project funds when the cash is received. Project expenditure is recognised as a use of project funds when payment is made. b) Period of accounts These special purpose financial statements cover the year ended 31 December c) Transactions and balances in foreign currencies The Project is domiciled in the Republic of Azerbaijan where the local currency is the Azerbaijani mana! ("AZN"). The Project's transactions are funded and expended in United States dollars and AZN. In accordance with the requirements of the World Bank, these special purpose financial statements are presented in United States dollars ("US dollar", "USD" or "US$"), which is the reporting currency of the Project. Transactions in other currencies are treated as transactions in foreign currencies. Cash receipts and payments arising from transactions in a foreign currency are recorded in the Project's reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of receipt and payment. Cash balances held in a foreign currency are reported using the closing rate, which is the spot exchange rate at the reporting date. Unrealised gains and losses arising from changes in foreign currency exchange rates are not cash receipts and payments. However, the effect of exchange rate changes on cash held in a foreign currency is reported in the statement of sources and uses of funds and other statements in order to reconcile cash at the beginning and the end of the period. These amounts are presented separately from cash receipts and payments and include the differences, if any, had those cash receipts and payments and balances been reported at end-of-period exchange rates. At 31 December 2014 the official AZN/USD exchange rate set by the Central Bank of Azerbaijan ("CBAR") was (2013: ). 3. CASH IDA Special account 75, ,306 IBRD 7516 AZ Special Account 828,156 2,063,319 IBRD 8381 AZ Special Account GoA Project Account 133,228 23,902 1,037,006 3,078,527 15

16 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) (Amounts are expressed in US dollars unless otherwise indicated) 4. STATEMENT OF EXPENDITURE (SOE) WITHDRAWAL SCHEDULE IDA Credit No AZ for the year ended 31 December /06/ ,508,729 1,290,100 Total 1,508,729 1,290, ,629 1,508, ,629 1,508,729 IDA Credit No AZ for the year ended 31 December 2013 ~ lfif,1ff. ' Ill>~. I lim! l.!.d.ll.. r:riif.'mid 1!1" Fll Lifo lif:fih... -~ \fi:liiliiijj -~ Ill ~- -. I IJ:iiiiiiltl] 01 /07/ ,107, ,192 01/11 / ,785, ,644,936 Total 2,893, ,509,128 IBRD Credit No AZ for the year ended 31 December !:AI~. llll! L!1lU' I Cl!l1l.!:f:ll::; 'I:li'.i I ' llll!l!.l1'. '"''' lf;'lrf.l... '\IUiillil'] r.1:ri'!;n 1l /06/ ,827,073-2,827, Total 2,827,073-2,827, ,154 1,207, ,028 1,785, ,182 2,993,310 lfjj ~ ,827,073-2,827,073 IBRD Credit No AZ for the year ended 31 December 2013 I... t'illr : r.rnr. m lii!l.!.l.ll ~I..!J 1.1::;!lJ,'..... lilf11. ~....t.ijj.lli ~ 01 /07/ ,696,709-2,696, /11/ ,998,364-2,998, Total 5,695,073-5,695, IBRD Credit No AZ for the year ended 31 December 2014 ~. (!I!ffi -.. c:iie!ii11-2,796,709-2,998,364-5,795,073 Front end fee 375, ,000 Total 375, , , ,000 16

17 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) (Amounts are expressed in US dollars unless otherwise indicated) 5. METHOD OF WITHDRAWAL a) IDA Special Account The Special Accounts maintained with the Kapital Bank of Azerbaijan are designated disbursement accounts of the Project to effect the payment of eligible expenditure, within defined limits, which do not require individual authorisation from IDA and IBRD. Available amounts were drawn down within the limits determined by the Financing Agreement. b) Direct payments from the Credit Account Under this method, the PIU prepares Applications based on supporting documents which are submitted to the World Bank. Payments are made from the Credit Account directly to the contractors. c) Project account (GOA) The Project maintains a separate account where the Government funds are accumulated. The funds are further disbursed to contractors based on the shares of expenditure to be incurred by each party to the Agreement. d) Statement of expenditure ("SOE") Under the SOE method, the Project forwards to the World Bank an application for reimbursement of payments already made using an Application for Withdrawal with SOE forms as the only documentation. 6. OPERATING ENVIRONMENT The Project's principal activities are within the Republic of Azerbaijan. Laws and regulations affecting entities operating in Azerbaijan are subject to rapid changes and the Project's operations could be at risk as a result of negative changes in the political and economic environment. 7. ACTUAL VS. BUDGET Statement of Project Activities for the year ended 31 December 2014 Actual Planned Variance Component A Rayon Investment A.1 Main Investments 74,508,143 74,415,000 93,143 A.2 Consultant Services 4,237,825 4,231,000 6,825 78,745,968 78,646,000 99,968 Component C. Project implementation and management 533, ,100 (21,859) 533, ,100 (21,859) Component Front end Fee 375, ,000 79,654,209 79,576,100 78,109 17

18 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) (Amounts are expressed in US dollars unless otherwise indicated) Statement of Project Activities for the year ended 31 December 2013 Actual Planned Variance Component A. Rayon Investment A.1 Main Investments 56,495,034 53,885,000 A.2 Consultant Services 4,469,284 4,445,000 60,964,318 58,330,000 Component C. Project implementation and management 542, , , ,222 Component Front end Fee 61,507,039 58,926,222 2,610,034 24,284 2,634,318 (53,501) (53,501) 2,580,817 18