Public Disclosure Authorized

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1 Public Disclosure Authorized Public Disclosure Authorized INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (IBRD) LOAN No AZ REPORT OF INDEPENDENT AUDITORS AND SPECIAL PURPOSE FINANCIAL STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2015 AND 31 DECEMBER 2014 Public Disclosure Authorized Public Disclosure Authorized

2 CONTENTS Page Statement of Management Responsibilities Report of Independent Auditors Balance Sheets Statements of Sources and Uses of Funds 7 Statements of Uses of Funds by Project Activities 8 Statements of Designated Account 9 Notes to the Special Purpose Financial Statements 10-13

3 STATEMENT OF MANAGEMENT RESPONSIBILITIES Management has prepared and is responsible for the special purpose financial statements and related notes of the Agricultural Competitiveness Improvement Project, (the "Project") financed by the International Bank for Reconstruction and Development Loans 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. Anar Azimov Fariz Huseynov PMU Director 4' PMU Financial specialist 29 June 2016 Baku, Azerbaijan 3

4 MOORE STEPHENS Moore Stephens Azerbaijan Limited 13, Zeynalabdin Taghiyev Street Baku AZ1005, Azerbaijan /48/ REPORT OF INDEPENDENT AUDITORS To the management of the Agricultural Competitiveness Improvement Project 1. We have audited the accompanying special purpose financial statements of the Agricultural Competitiveness Improvement Project (the "Project") financed under the International Bank for Reconstruction and Development ("IBRD") Loans No AZ which comprise the balance sheets as of 31 December 2015 and 31 December 2014, statements of sources and uses of funds, statements of uses of funds by project activities, statements of designated account, statements of expenditure ("SOE") withdrawal schedules for the years then ended and a summary of significant accounting policies and other explanatory notes. We have also audited the Project's compliance with conditions of the relevant Loan Agreements, the World Bank guidelines, laws and regulations of the Azerbaijan Republic. Management's responsibility for the financial statements 2. Management is responsible for the preparation and fair presentation of these 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. Management is also responsible for compliance with the relevant Loan Agreements, the World Bank guidelines, laws and regulations. Auditors' responsibility 3. Our responsibility is to express an opinion on these special purpose financial statements and on compliance 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 relevant World Bank guidelines. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the 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 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 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 balance sheets of the Project and of the Special Accounts as of 31 December 2015 and 31 December 2014 and the Project's related sources and uses of funds, movements in designated accounts and statements of expenditure for the years ended 31 December 2015 and 31 December 2014 in accordance with the basis of accounting described in Note 2 to the accompanying special purpose financial statements; and b) the Project was, in all material respects, in compliance with the conditions of the relevant Loan Agreements and the World Bank guidelines and laws and regulations of the Azerbaijan Republic during the years ended 31 December 2015 and 31 December 2014, I /t 29 June

6 BALANCE SHEETS AS AT 31 DECEMBER 2015 AND 31 DECEMBER 2014 (Expressed in US dollars) ASSETS AND CUMULATIVE EXPENDITURE Note Cash in bank 4 2,897,903 1,854,810 Cumulative Project expenditures 5, ,689 SOURCES OF FUNDS 8,714,941 2,085,499 Project financing 8,860,125 2,086,243 Accumulated foreign exchange difference (145,184) (744) 8,714,941 2,085,499 Anar Azimov PMUJ Director Fariz Huseynov PMU Financial specialist The notes set out on pages form an integral part of these financial statements 6

7 STATEMENTS OF SOURCES AND USES OF FUNDS FOR THE YEARS ENDED 31 DECEMBER 2015 AND 31 DECEMBER 2014 (Expressed in US dollars) Note 2015 OPENING BALANCES 2014 Cumulative IBRD Loan Designated Account No ,854,810 Government of Azerbaijan 4-1,854,810 ADD: FUNDS RECEIVED BY SOURCES IBRD Loan Designated Account No ,835,409 1,999,993 IBRD Loan 6,835,402 Designated Account No (front-end fee) - 86,250 86,250 4,835,409 2,086,243 6,921,662 Government of the Republic of Azerbaijan 1,936,893-1,936,893 Tender fee 1,580-1,580 6,773,882 2,086,243 8,860,125 TRANSFERS BETWEEN ACCOUNTS Special account 55,774 - Project account 55,774 (55,774) - (55,774) ADDlLESS:EXCHANGE DIFFERENCE IBRD Loan Designated Account No (22,349) (744) Government (23,093) of the Republic of Azerbaijan (122,091) - (122,091) (144,440) (744 (146,184) LESS: EXPENDITURE IBRD Loan Designated Account No Consultants Services including Audit 67,107 8,210 Incremental operating 75,317 costs 311, ,229 Serological Survey 447,337 Fees 38,424 Sub- - loans and 38,424 lease financing 2,807,215 Front-end - 2,807,215 fee 86,250 Goods 86,250 Trainings 626, ,187 47,900-47,900 3,897, ,689 4,128,630 Government of the Republic of Azerbaijan Consultants Services including Audit 34,060 - Incremental operating 34,060 costs 112,145 - Serological Survey Fees 112,145 17,033 17,033 Sub- loans and lease financing 1,134,565 Goods - 1,134, , ,984 Trainings 18,621-18,621 1,688,408-1,688,408 TOTAL EXPENDITURE 5,586, ,689 5,817,038 CLOSING BALANCES IBRD Loan Designated Account No ,825,703 1,854,810 Government of the Republic of Azerbaijan 4 72,200-2,897,903 1,854,810 AnarAzimov PMU Director Fariz Huseynov PMU Financial specialist The notes set out on pages form an integral part of these financial statements 7

8 STATEMENTS OF USES OF FUNDS BY PROJECT ACTIVITIES FOR THE YEARS ENDED 31 DECEMBER 2016 AND 31 DECEMBER 2014 (Expressed in US dollars) Project Component/Activity Cumulative A: Support for sanitary and phytosanitary services Al. Food Safety Capacity Building. A2. Upgrading Plant Health and Phytosanitarian Sys 45,753-45,753 A3. Animal Health and Veterinary Services 1,145,250 25,557 1,170,807 1,191,003 25,557 1,216,560 B. Agribusiness value chain development Bi1. Agribusiness value chain development 60,765 10,064 70, Seeds Sector Development ,765 10,064 70,829 C. Financial Services to Agribusiness 3,984,626-3,984,626 D. Project Management 349, , ,773 Front-end-Fee (IBRD) 86,250 86,250 5,586, ,689 5,817,038 Anar Azimov PMU Directomr Fariz Huseynov PMU Financial specialist The notes set out on pages form an integral part of these financial statements 8

9 STATEMENTS OF DESIGNATED ACCOUNT FOR THE YEARS ENDED 31 DECEMBER 2015 AND 31 DECEMBER 2014 (Expressed in US dollars) Account number Depository Bank IBRD-8286DA: AZ731BAZ International Bank of Azerbaijan Cumulative Balance at the beginning of reporting period 1,854, ,854, ADD: Advances and replenishments 4,835,409 2,086,243 6,921,652 4,835,409 2,086,243 6,921,652 DEDUCT: Eligible expenditure (3,879,512) (143,647) (4,023,159) Bank charges (18,429) (792) (19,221) Front-end fee - (86,250) (86,250) Total expenditures (3,897,941) (230,689) (4,128,630) ADJUSTMENTS: Foreign Exchange loss (22,349) (744) (23,093) Transfers between accounts (22,349) (74) (23,093) Transfers between accounts 55,774-55,774 Balance at the end of reporting period 55,774-55,774 2,825,703 1,854,810 2,825,703 Anar Azimov PMU Director Fariz Huseynov PMU Financial specialist The notes set out on pages form an integral part of these financial statements 9

10 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED 31 DECEMBER 2015 AND 31 DECEMBER 2014 (Amounts are expressed in US dollars unless otherwise indicated) NOTE 1. BACKGROUND IBRD Loan Designated Account No Agricultural Competitiveness Improvement Project (the "Project") is a project established and projected by the Government of Azerbaijan and World Bank and implemented by the State Service on Management of Agricultural Projects and Credits under the Ministry of Agriculture of Azerbaijan Republic to facilitate the access of agricultural producers to markets by strengthening sanitary and phytosanitary services, enhancing selected value chains and providing financial services to agribusiness enterprises.. The Project consists of the following parts: Part A: Support for sanitary and phytosanitary services Strengthening the efficiency and effectiveness of sanitary and phytosanitary services in order to reduce existing obstacles to agricultural and food trade: 1. Food safety capacity building through the establishment of a national food and safety implementing training center comprehensive training program. 2. Upgrading the State Phytosanitary Control Services (SPCS) by: (a) strengthening capacity pest diagnostic through provision of equipment for SPCS laboratories and Training; control (b) and enhancing pest risk pest analysis capacity through the provision of goods, consultants' Training; services and (c) supporting and biological control program and promoting integrated through pest the management provision of goods, consultants' services and Training. 3. Enhancing animal health and veterinary services by: (a) enhancing access veterinary to quality-assured services to strengthen the State Veterinary Service (SVS) field units complimentary and promotion private of a veterinary service; (b) strengthening the disease preparedness surveillance functions and of the SVS by implementing animal disease development control programs of an and animal disease control information system; and (c) veterinary providing education, support including to upgrading the veterinary faculty of the Azerbaijan University, State all through Agricultural the provision of goods, consultants' services and Training. Part B: Agribusiness value chain development 1. Development of the agribusiness value chain through: (a) provision of Training, consultants' services, workshops and awareness campaigns for value chain participants to assist them in establishing productive partnerships and preparing Value-chain Sub-project proposals; and (b) provision of Grants to finance eligible demand-driven Individual Investments under Value-chain Sub-projects for the development of value chains in accordance with the Operational Manual. 2. Provision of goods, consultants' services and Training to support: (a) seed research and variety development program; (b) seed production and processing capabilities; (c) state seed inspection and variety testing services and seed testing laboratories; and (d) private seed growers. Part C: Financial services to agribusiness Enhancing the financial services to agribusiness through: 1. The expansion of access to rural financial services provided by eligible PFIs through the provision of Sub-loans and Lease Financing to agribusiness enterprises (Subloan Beneficiaries and/or Lease Financing Beneficiaries) in accordance with the AIG. 2. The implementation of a capacity building program to improve skills in agricultural lending through provision of consultants' service and Training. 3. Support to the development of the agricultural insurance program through the provision of consultants' services and Training. Part D: Project Management Support of the PMU for the effective implementation of the Project, through provision of goods, works, consultants' services, Training and Operating Costs. 10

11 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED 31 DECEMBER 2015 AND 31 DECEMBER 2014 (Amounts are expressed in US dollars unless otherwise indicated) NOTE 1. BACKGROUND (CONTINIUED) The following table specifies the categories of Eligible Expenditures 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 expenditures to be financed for Eligible Expenditures in each Category. (1) Goods, works, non-consulting services, consultants' services including audit, Training, Incremental Operating Costs, Serological Survey Fees, Vaccination Fees, Grants, Lease Financing and Subloans Amount payable pursuant to (2) Front-end Fee 86,250 Section 2.03 of this Agreement in accordance with Section 2.07 (b) of the General Conditions (3) Interest Rate Cap or Interest Rate Amount due pursuant to Section Collar premium 2.07(c) of this Agreement government Contribution. The Government's contribution of US$18.75 million to finance project expenditures will be disbursed from budget allocations through the treasury system of the Ministry of Finance of the Republic of Azerbaijan and managed by the PMU. Funds will be released to the project to finance project expenditures as expenditures are incurred and the Project Account shall be replenished regularly to minimize delays in project implementation. The Closing Date of the Project is December 31, 2018 The registered address of the Project is 80 U. Hajibeyli Street, Government House, Baku, Azerbaijan. NOTE 2. ACCOUNTING POLICIES 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. 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 years ended 31 December 2015 and 31 December 2014.

12 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED 31 DECEMBER 2015 AND 31 DECEMBER 2014 (Amounts are expressed in US dollars unless otherwise indicated) NOTE 2. ACCOUNTING POLICIES (CONTINUED) c) Transactions and balances in foreign currencies The Project is domiciled in the Republic of Azerbaijan where the local currency is the Azerbaijani manat ("AZN"). Because the majority of the Project's transactions are funded and expended in United States dollars and 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$"), which is the reporting currency of the Project. Transactions in other currencies are treated as transactions in foreign currencies. Cash receipts and payments arising from transactions in a foreign currency are recorded in the Project's reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of receipt and payment. Cash balances held in a foreign currency are reported using the closing rate, which is the spot exchange rate at the reporting date. Unrealised gains and losses arising from changes in foreign currency exchange rates are not cash receipts and payments. However, the effect of exchange rate changes on cash held in a foreign currency is reported in the statement of sources and uses of funds and other statements in order to reconcile cash at the beginning and the end of the period. These amounts are presented separately from cash receipts and payments and include the differences, if any, had those cash receipts and payments and balances been reported at end-of-period exchange rates. At 31 December 2015 the official AZN/USD exchange rates set by the Central Bank of Azerbaijan ("CBAR") were and 31 December 2014 were as NOTE 3. DESIGNATED ACCOUNT The Designated Account is a disbursement account of the Project maintained in US dollars with the International Bank of Azerbaijan in order to effect payment of eligible expenditure within defined limits, which do not require individual authorisation from l8rd, in accordance with the Agreement. NOTE 4. CASH IN BANK IBRD Loan 8286 AZ Designated, US$ 2,825,703 1,854,810 Government Project Account, US$ 72,200-2,897,903 1,854,810 NOTE 5. METHODS OF WITHDRAWAL The methods of withdrawal used from the inception of the IBRD Loan up to 31 December 2015 were as follows: (a) Designated account Available amounts were drawn from time to time within limits determined by the loan agreements for the direct payment of eligible expenditure for sub-projects from the designated account. (b) Project account The Project maintains a separate account where the Government counterpart funds are accumulated. The funds are further disbursed to contractors based on the shares of expenditure to be incurred by each contractor. (c) Statement of expenditure (SOE) Under the SOE method, the Project submits to the World Bank an application for reimbursement of payments already made using an Application for Withdrawal (Form 2380 E) with SOE forms, bank reconciliation forms and the bank account statement. 12

13 NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED 31 DECEMBER 2015 AND 31 DECEMBER 2014 (Amounts are expressed in US dollars unless otherwise indicated) NOTE 6. STATEMENT OF EXPENDITURE (SOE) WITHDRAWAL SCHEDULE For the year ended 31 December /2015 CIP/IBR ,267 31,495 11, , /10/2 015 A C P R ,945 20/11/2015 4, ,952 8,449 17, , , , , ,812 1,081,237-05, /12/2015 ACIP/lBRE- 150, ,961-1,788,878 1, * Incremental operating costs * For each withdrawal of application, IBRD charged service fee with total amount of USD 7. There were five in total; therefore, the amount of service fees was equal to USD 35. For the year ended 31 December /08/2014 Front end / C ,000,000 86,250-88,250 2,0000 For each withdrawal of application, 1BRD charged service fee with total amount of USD 7. NOTE 7. OPERATING ENVIRONMENT The Project's principal activities are within the Azerbaijan Republic. Laws and regulations affecting entities operating in Azerbaijan are subject to rapid changes and the Project's assets and operations could be at risk due to negative changes in the political and economic environment. 13