REPUBLIC OF TURKEY PRIME MINISTRY Undersecretariat of Treasury. Implemented by. And Financed Under World Bank Loan No TU

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1 Public Disclosure Authorized REPUBLIC OF TURKEY PRIME MINISTRY Undersecretariat of Treasury INDEPENDENT AUDITOR'S REPORT Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized On ISTANBUL SEISMIC RISK MITIGATION AND EMERGENCY PREPAREDNESS PROJECT ADDITIONAL FINANCE Implemented by ISTANBUL GOVERNORSHIP ISTANBUL PROJECT COORDINATION UNIT And Financed Under World Bank Loan No TU As of December 31, 2015 Report Number: 133/2-97/3-22/2-32/2 Prepared by Zekiye Z. BALOGLU Sileyman BIYIK Ceren KONAK M. Emre BAYKAL Senior Treasury Controller Treasury Controller Treasury Controller Treasury Controller June 23, 2016

2 TABLE OF CONTENTS 1. EXECUTIVE SUMMARY 2. 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

3 Li L. EXECUTIVE SUJMMARY

4 EXECUTIVE SUMMARY A. Project Summary: Against the risk of a major earthquake, Istanbul Seismic Risk Mitigation and Emergency Preparedness (ISMEP) Project had been prepared by the Turkish Government in order to transform Istanbul into a city of greater resilience on a period of 10 to 20 years from the establishment date of the project on. The Istanbul Seismic Risk Mitigation and Emergency Preparedness (ISMEP) Loan Agreement (Loan No TU) was signed by the Republic of Turkey and the International Bank for Reconstruction and Development on October 18, 2005, and was brought into effect as of February 3, 2006, The original closing date of the project being March 31, 2010, was first extended to December 31, Following a second extension, the closing date was determined to be December 31, Due to the ever-expanding scope of the project along with the unanticipated increases, a second agreement was signed between the Republic of Turkey and the World Bank on August 4, 2011 for an additional loan (Loan No TU). The project operations have been implemented and supervised by istanbul Project Coordination Unit (IPCU) which was founded as an organ of the istanbul Special Provincial Administration during the commencement of the project. As of March 31, 2014, IPCU was institutionally transferred into the organization of The Governorship of tstanbul as the legal entity of the Istanbul Special Provincial Administration was abolished by the Law 6360, published in the December 06, 2012 copy of the official gazette. In line with this change of entity, an amendment to the Loan Agreement was made on December 12, 2014 including the provisions that "IPCU means the Istanbul Project Coordination Unit established within the Governorship of istanbul for overall Project implementation and supervision" and "Every reference to the term istanbul Special Provincial Administration or ISPA is replaced throughout the Loan Agreement by the term "Governorship of istanbul" ". The closing date of the project was also extended to December 31, 2015 by the amendment, which was originally December 31, The main goals of the Project are; enhancing the institutional and technical capacity on disaster management, improving the consciousness of the public towards emergency preparedness and intervention, analyzing the seismic condition of the public facilities having priority, retrofitting or re-building of these facilities according to the outcomes of the seismic analysis, creating the seismic risk inventory of cultural and historical buildings stock and taking supportive measures for the more effective implementation of building codes and land use plans, all of which contribute to the aim of improving the preparedness of Istanbul against a major earthquake. The Project is comprised of four components: Component A) Increasing The Capacity Of Emergency Preparedness. Component B) Seismic Risk Mitigation For Priority Public Buildings. Component C) The Effective Usage Of Zoning And Building Regulations. Component D) Project Management. According to the project financial statements, EUR ,09 was disbursed in this auditing period. So, total amount disbursed from the project resources (including front and fee) have amounted to EUR ,51 by December 31, 2015.

5 B. Objectives of Audit: The objectives of our audit are; a) To provide an opinion on whether the financial statements, prepared as of December 31, 2015 and for the year then ended, give a true and fair view of the financial position of the Project in accordance with the cash receipts and disbursements basis of accounting, b) To determine, as of December 31, 2015, whether IPCU has complied, in all material respects, with the rules and procedures of the Loan Agreement 8033-TU, 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 World Bank Loan Agreement 8033-TU. C. Scope of Audit: We have performed an audit of financial statements of the ISMEP as of December 31, 2015 and for the year 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 loan agreement and related World Bank guidelines. Our audit was conducted in accordance with the International Standards on Auditing published by International Federation of Accountants. 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. In addition, as of December 31, 2015, the IPCU has complied, in all material respects, with the rules and procedures of the Loan Agreement. With respect to SOEs, adequate supporting documentation has been maintained to support claims to the World Bank for reimbursements of expenditures incurred; and these expenditures are eligible for financing under the World Bank Loan Agreement 8033-TU. E. Management Recommendations: A Management Letter, dated June 23, 2016, to the attention of the tstanbul Project Coordination Unit 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 in order of priorities are attached to the Letter.

6 V F V V FINANCIAL STATEMENTS OF THE PROJECT V

7 REPUBLIC OF TURKEY PRIME MINISTRY Undersecretariat of Treasury INDEPENDENT AUDITOR'S REPORT TO THE ISTANBUL GOVERNORSHIP - ISTANBUL PROJECT COORDINATION UNIT We have audited 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 of the Istanbul Seismic Risk Mitigation and Emergency Preparedness (ISMEP) Project's Additional Finance as of December 31, 2015, and for the period then ended, and a summary of significant accounting policies and other explanatory information. The financial statements have been prepared by Istanbul Governorship (Istanbul Project Coordination Unit-IPCU) based on relevant provisions of the Loan agreement TU Management's Responsibility for the Financial Statements IPCU is responsible for the preparation and fair presentation of the above mentioned financial statements in accordance with the relevant provisions of the Loan agreement 8033-TU, and for maintaining the internal control required to enable the preparation of 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 financial statements based on our audit, and to determine whether IPCU has complied with, in all material respects, the requirements of the Loan agreement 8033-TU. 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 on whether the financial statements are free from material misstatement and whether IPCU has complied with the requirements of the Loan agreement 8033-TU in all material respects,. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement in 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

8 Opinion 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 ISMEP Project as of December 31, 2015 and for the period then ended in accordance with the provisions of the Loan agreement No TU. b) IPCU, as of December 31, 2015 has complied with, in all material respects, the requirements of the Loan agreement No.8033-TU. 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 Loan agreement No.8033-TU. Basis of Accounting and Restriction on Distribution and Use Without modifying our opinion, we draw attention to Note 2 to the financial statements, which describe the basis of accounting. The financial statements are prepared to assist IPCU to comply with the financial reporting provisions of the Loan agreement No.8033-TU. As a result, the financial statements may not be suitable for another purpose. Our report is intended solely for IPCU, Undersecretariat of Treasury, and World Bank, and should not be distributed or used by other parties. A. 4TmSUCU Acting Chairman of Board of Treasury Controllers i CALI$KAN (Audit Partner) Vice-Chairman Zekiye Z. BALOOLU Slileyman BIYIK Ceren KONAK M. Emre BAYKAL Senior Treasury Controller Treasury Controller Treasury Controller Treasury Controller Date June 23, 2016 Address Republic of Turkey, Prime Ministry, Undersecretariat of Treasury, Board of Treasury Controllers, Emek ANKARA/TURKEY

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13 REPUBLIC OF TURKEY ISTANBUL GOVERNORSHIP ISTANBUL PROJECT COORDINATION UNIT (IPCU) 8033-TR ISTANBUL SEISMIC RISK MITIGATION AND EMERGENCY PREPAREDNESS PROJECT ADDITIONAL FINANCE NOTES TO THE PROJECT FINANCIAL STATEMENTS ( ) 1. OBJECTIVES AND NATURE OF THE PROJECT To transform Istanbul in the next years into a city more resilient to a major earthquake Istanbul Seismic Risk Mitigation and Emergency Preparedness (ISMEP) Project had been prepared by the Turkish Government. The World Bank and the Turkish Government signed a Loan Agreement (4784-TU) in the amount of Euro million (US$ million equivalent) on October 18, 2005 for the funding of ISMEP. The agreement became effective on February 3, Istanbul Special Provincial Administration, Istanbul Project Coordination Unit (IPCU) is responsible for the implementation of this project. Loan Agreement (4784-TU) closing date 31 December Republic of Turkey Council of Minister's Decree Number 2011/1410 dated February 8, 201 1,The World Bank and the Turkish Government signed a Loan Agreement (8033-TR) in the amount of Euro million on August 04, 2011 for the funding of ISMEP. The overall goal of the proposed project is to save lives and reduce the social, economic and financial impacts in the event of future earthquakes. The specific objective of the project is to improve the city of Istanbul's preparedness for a potential earthquake through enhancing the institutional and technical capacity for disaster management and emergency response, strengthening critical public facilities for earthquake resistance, and supporting measures for better enforcement of building codes and land use plans. 2. MAIN ACCOUNTING POLICIES a) IPCU accounts the project-related operations on the basis of cash. Accordingly, revenues are received when the loan is transferred to the special accounts, and expenditures arise when a payment is made. Payments made to suppliers are expensed at the date of payment. However, tax withdrawals from suppliers are accrued in bank accounts and expensed on the date of the payment of these taxes one month later. b) IPCU is responsible for the payments, accountings, records and all financial reports on the projectrelated activities, resources and expenditures within the framework of the Project. Those records and accounts are prepared for the special accounts to be held by the independent auditors acceptable to the Bank, in accordance with the auditing conditions acceptable to the Bank, in each fiscal year.

14 c) IPCU procured an accounting software program, Financial Management System ("FMS"), to follow up the payments and accounting records of the project. Data entry to FMS is conducted based on the payment dates. The transactions recorded in local currency (Turkish Lira - TL) are converted to the EURO using the exchange rate prevailing at the date of withdrawal in accordance with Central Bank's official bid rates for Euro. Since these rates are entered daily to FMS, conversions from TL to EURO are automatically held. FMS software was developed in compliance with Accounting Standards, for each accounting record, an automatically numbered wage receipt is taken. Receipts, invoices, contracts and payment orders are filed and archived regularly, Below there is a list of the reports received from FMS: i. Project Resources and Fund Use ii. Use of Funds on the base of Project Activities iii. Cash Withdrawals iv. Special Account Table (based on Euro) c) There is one special account under the investment framework of the project, opened in the Central Bank. As of December 31, 2015, a total amount of EURO has been used from the World Bank account. 3. RESTRICTIONS CONCERNING THE USE OF THE FUNDS AND OTHER ASSETS In accordance with the Loan Agreement signed between Turkish Government and the Bank, use of those resources in the Special Account is limited to the project objectives. Those resources still unused at the end of the Project will be returned back to the Bank, in compliance with the related financing agreement. Records shall be kept on the project resources and those assets procured through the project resources during the project and the subprojects. 4. VARIANCES FROM THE PLANNED AMOUNT IPCU is carrying out a revision on the distribution of the expenses over the years under the scope of the project and variations from the planned amount and the current and cumulative planned amounts are changing as well. In 2015, project investments realized ,91 Euro below the planned amount. 5. CASH AVAILABLE AT 31 DECEMBER 2015 Cash available at is as follows.(euro)

15 Funds Other Funds Total Special Account , ,21 Commercial Bank Current Ac Commercial Bank Tax Ac , ,31 Commercial Bank Payment ac Commercial Bank Auction Ac Comercial Bank Suppliers ac Cash Toplan , ,52 6. Withdrawals from special account for VAT, Income taxes, and Stamp Duties are made in accordance with the contract payments spontaneously. For that purpose, three accounts are established in Vakifbank for each tax type and all tax payments are made from these accounts after the tax accrual statement is obtained from tax office. As a result no FX differences occur in financial statements. In Tax Accounts at Vakifbank there are accrued but not yet paid taxes. These balances are not expensed in financial statements since still in bank accounts as of Total tax liabilities are ,31 Euro as of In 2015, ,59 Euro sources withdrawn to TCMB account from the World Bank. 8. In 2015 total request for withdrawal realized at EUR ,04 from Worldbank. During the withdrawals; EUR ,45 in 22th application deduction by the World Bank. These amounts are deducted from application amounts with their respective shares in cumulative SOE and Summary Sheet type breakdowns. 9.According to the World Banks Contract, time of extension has done and based on this the advance of Euro ,00 is used which was closed previosuly. zim G6kh ELGIN Uk NADIR Director Deputy Governor