JUDICIAL MODERNIZATION PROJECT OF THE REPUBLIC OF AZERBAIJAN CREDIT NUMBER 4209 AZ, 4961 AZ AND LOAN NUMBER 8068 AZ

Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized JUDICIAL MODERNIZATION PROJECT OF THE REPUBLIC OF AZERBAIJAN CREDIT NUMBER 4209 AZ, 4961 AZ AND LOAN NUMBER 8068 AZ Special-Purpose Financial Statements and Independent Auditors' Report For the Year Ended December 31, 2012

JUDICIAL MODERNIZATION PROJECT OF THE REPUBLIC OF AZERBAIJAN TABLE OF CONTENTS Page INDEPENDENT AUDITORS' REPORT 1-2 SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,2012: Special-Purpose Balance Sheet Statement of Cash Receipts and Payments Statement of Project Activities Statement of Designated and Project Accounts Statement of Expenditure and Summary Sheet Withdrawal Schedule Notes to the Special-Purpose Financial Statements 3 4-7 8-11 12-13 14-17 18-24

AZERBAIJAN Audit, Tax and Consulting Bridge Plaza, 11th floor 6 Bakikhanov Street AZ1065, Baku Azerbaijan T: +994 (12) 404 51 52 F: +994 (12) 404 51 53 office@bakertillyaz.az www. bakertillyaz. az INDEPENDENT AUDITORS' REPORT To the Management of the Judicial Modernization Team of the Judicial Modernization Project of the Republic of Azerbaijan: We have audited the accompanying Special-Purpose Financial Statements of the Judicial Modernization Project of the Republic of Azerbaijan (the "Project"), which comprise the Special-Purpose Balance Sheet as at December 31, 2012, and the Statement of Cash Receipts and Payments, the Statement of Project Activities, the Statement of Designated and Project Accounts and the Statement of Expenditure and Summary Sheet Withdrawal Schedule ("SOE and SSWS") for the year then ended, and a summary of significant accounting policies and other explanatory notes (collectively referred to as the "Special-Purpose Financial Statements") financed under the International Development Association (the "Association") through credit agreements 4209 AZ, 4961 AZ and the International Bank for Reconstruction and Development (the "Bank") through loan agreement 8068 AZ. Management's Responsibility for the Special-Purpose Financial Statements Management is responsible for the preparation and fair presentation of these Special-Purpose Financial Statements in accordance with International Public Sector Accounting Standard ("IPSAS") "Financial Reporting under the Cash Basis of Accounting" issued by International Public Sector Accounting Standards Board ofthe International Federation of Accountants and relevant provisions of the financing agreements as described in Note 2 to the Special-Purpose Financial Statements 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. Auditors' Responsibility Our responsibility is to express an opmwn on these Special-Purpose Financial Statements based on conducting the 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 whether the Special-Purpose Financial Statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in these Special-Purpose Financial Statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the Special-Purpose 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 independent member of Baker T1lly International

~ AKER TILLY AZERBAIJAN 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 Financial Statements. 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 Special-Purpose Financial Statements present fairly, in all material respects, the financial position of the Project as at December 31, 20 12, the cash receipts and disbursements on behalf of the Project and transactions passed through the Project's special accounts for the year ended December 31, 2012 in accordance with IPSAS "Financial Reporting under the Cash Basis of Accounting" and relevant provisions of the credit agreements as described in Note 2 of the Special-Purpose Financial Statements. In addition, with respect to the SOE and SSWS, all payments reported are eligible for financing under the respective credit and grant agreements and adequate documentation have been maintained to support the claims for withdrawal. Report on Other Requirements Pursuant to the amendment made to the terms of reference for audit engagement in regard of the Project on September 12, 2013, we report, to the extent of substantive audit procedures performed, that the existing balances with the third party contractors as described in Note 6 of the Special-Purpose Financial Statements are accurate and they are within the limits of the existing contracts and no additional works are ordered out of the existing contacts as at December 31, 2012. Other Matter Our audit opinion on these Special-Purpose Financial Statements previously issued on May 20, 2013 becomes void due to changes made to the terms of the reference of the audit engagement on September 12, 2013. 13-k- 'I'!~ September 20, 2013 Baku, the Republic of Azerbaijan A:terba.'f'\

SPECIAL-PURPOSE BALANCE SHEET FOR THE YEAR ENDED DECEMBER 31, 2012 Note December 31, 2012 December 31, 2011 ASSETS AND CUMULATIVE USES OF FUNDS Cash at bank and in hand Project expenditure Prepayments TOTAL ASSETS AND CUMULATIVE USES OF FUNDS SOURCES OF FUNDS Project funds Payables Other funds Accumulated exchange rate differences TOTALSOURCESOFFUNDS 3 2, 120,167 44,126,541 5 14,267,881 60,514,589 60,068,332 404,772 8 40,207 1,278 60,514,589 904,658 22,269,338 13,461,569 36,635,565 36,615,226 20,052 287 36,635,565 Project Director Azer Jafarov September 20, 20 13 Baku, the Republic of Azerbaijan The notes on pages 18-24 form an integral part of these special-purpose financial statements. 3

STATEMENT OF CASH RECEIPTS AND PAYMENTS FOR THE YEAR ENDED DECEMBER 31,2012 Year ended Year ended Cumulative December 31, December 31, December 31, 2012 2011 2012 OPENING BALANCE IDA Designated Account 4209 AZ 592,863 1,483,857 IDA Designated Account 4961 AZ IBRD Designated Account 8068 AZ Cash in hand 14,166 2,202 PHRD Grant Account 119,344 1,229 Project Account 178,285 30,693 TOTAL OPENING BALANCE 904,658 1,517,981 ADD: FUNDS RECEIVED IDA Credit Number 4209 AZ Initial deposit to the IDA Designated Account 2,000,000 SOE replenishment 10,010,023 21,100,808 Refund (13,121) (13,121) IDA Credit Number 4961 AZ Initial deposit to the IDA Designated Account 1,000,000 1,000,000 SOE replenishment 1,700,718 1,700,718 Total IDA Credit funds 2,683,995 10,010,023 25,784,803 IBRD Loan Number 8068 Initial deposit to the IBRD Designated Account 2,500,000 2,500,000 Direct funding 5,348,306 5,348,306 SOE replenishment 1,319,328 1,319,328 Total IBRD Loan funds 9,167,634 9,167,634 Government funding for Credit Number 4209 AZ Initial deposit to the Project Account 50,006 Advances 2,548,953 5,698,245 12,709,689 Direct funding 441,461 Government funding for Credit Number 4961 AZ Advances 1,911,277 1,911,277 Government funding for Loan Number 8068 AZ Advances 7,260,591 7,260,591 Total Government of Azerbaijan funds 11,720,821 5,698,245 22,373,024 PHRDGrant Initial deposit to the PHRD Grant Account 350,000 SOE replenishment 506,835 2,512,215 Refund (122,946) (122,946) Total PHRD Grant funds (122,946) 506,835 2,739,269 4

STATEMENT OF CASH RECEIPTS AND PAYMEN'fS FOR THE YEAR ENDED DECEMBER 31,2012 (Continued) Year ended Year ended Cumulative December 31, December 31, December 31, 2012 2011 2012 Other funds Refund prior year expenditures to the IDA Designated Account 4209 13,379 13,379 Refund prior year expenditures to the PHRD Grant Account 3,602 3,602 Tender fees accumulated in the IDA Designated Account 4209 1,726 Tender fees accumulated in the IDA Designated Account 4961 948 Tender fees accumulated in the Project Account 2,226 3,270 20,552 Total other funds 20,155 3,270 40,207 TOTAL FUNDS RECEIVED 23,473,261 16,218,373 60,108,539 NET TRANSFERS BETWEEN ACCOUNTS AND CASH WITHDRAWALS Net transfers between accounts Transfer from the PHRD Grant Account to the IDA Designated Account (745,822) Transfer from the IDA Designated Account to the PHRD Grant Account (727,980) Transfer from the IDA Designated Account to the Project Account (56,823) (58,368) Transfer from the Project Account to the IDA Designated Account (56,754) (56,754) Transfer to the IDA Designated Account from the PHRD Grant Account 745,822 Transfer to the PHRD Grant Account from the IDA Designated Account 727,980 Transfer to the Project Account from the IDA Designated Account 56,823 58,368 Transfer to the IDA Designated Account from the Project Account 56,754 56,754 Total net transfers between accounts Cash withdrawals/ida Credit Number 4209 AZ Cash withdrawn from the IDA Designated Account (10,880) (87,000) Total cash withdrawals IDA Credit Number 4209 AZ (10,880) (87,000) Cash refunds/ida Credit Number 4209 AZ Cash refunded to the IDA Designated Account 23,744 (4,737) Total cash refund IDA Credit Number 4209 AZ 23,744 (4,737) Cash withdrawals/ida Credit Number 4961 AZ Cash withdrawn from the IDA Designated Account (87,000) (87,000) Total cash withdrawals IDA Credit Number 4961 AZ (87,000) (87,000) Cash withdrawals!ibrd Loan Number 8068 AZ Cash withdrawn from the IBRD Designated Account (4,737) (4,737) Total cash withdrawals IBRD Loan Number 8068 AZ (4,737) (4,737) 5

STATEtv1ENT OF CASH RECEIPTS AND PAYMENTS FOR THE YEAR ENDED DECEMBER 31, 2012 (Continued) LESS: EXPENDITURE Year ended December 31, 2012 Year ended December 31, 2011 Cumulative December 31, 2012 IDA Credit Number 4209 AZ (bank payments) 1. Civil works 2. Goods 3. Consultants' services 4. Training 5. Incremental Operating Costs (401,541) (103,134) (8,381) (35,967) (2,897,913) (6,646,543) (889,305) (4,596) (457,987) (7,984,635) (9,601,314) (3,730,786) (353,977) (1,188,746) Total IDA Credit Number 4209 AZ (bank payments) (549,023) (10,896,344) (22,859,458) IDA Credit Number 4961 AZ (bank payments) 2. Goods 3. Consultants' services 4. Training 5. Incremental Operating Costs (675,987) (l,357,510) (54,474) (260,985) (675,987) (1,357,510) (54,474) (260,985) Total IDA Credit Number 4961 AZ (bank payments) (2,348,956) (2,348,956) Total IDA Credit expenditure (bank payments) (2,897,979) (10,896,344) (25,208,414) IDA Credit Number 4209 AZ (cash payments) 3. Consultants' services 4. Training 5. Incremental Operating Costs (l, 198) (10,350) (4,239) (35,245) (73,571) (50,153) (242,957) Total IDA Credit Number 4209 AZ (cash payments) (1,198) (49,834) (366,681) IDA Credit Number 4961 AZ (cash payments) 4. Training 5. Incremental Operating Costs (476) (85,928) (476) (85,928) Total IDA Credit Number 4961 AZ (cash payments) (86,404) (86,404) Total IDA Credit expenditure (cash payments) (87,602) (49,834) (453,085) IBRD Loan Number 8068 AZ (bank payments) 1. Civil works 2. Goods 3. Consultants' services 5. Incremental Operating Costs 6. Front-end fee (6,880,386) (355,503) (419) (28,969) (60,500) (6,880,386) (355,503) (419) (28,969) (60,500) Total IBRD Loan Number 8068 AZ expenditure (bank payments) (7,325,777) (7,325,777) IBRD Loan Number 8068 AZ (cash payments) 3. Consultant's services (4,737) (4,737) Total IBRD Loan Number 8068 AZ (cash payments) (4,737) (4,737) 6

STATEMENT OF CASH RECEIPTS AND PAYMENTS FOR THE YEAR ENDED DECEMBER 31,2012 (Continued) Government of Azerbaijan expenditures for IDA Credit Number 4209 AZ (bank payments) I. Civil works 2. Goods 3. Consultants' services 5. Incremental Operating Costs (2,768,819) (649) (3,871,237) (I,560,059) (57,190) {3,595) (8,035,593) {2, 148,882) (57, 190) (46,452) Government of Azerbaijan expenditures for IDA Credit Number 4961 AZ (bank payments) 2. Goods 3. Consultants' services 4. Training 5. Incremental Operating Costs (I,704,786) (191,592) (I,585) {13,351) (I,704,786) (191,592) (1,585) (13,351) Government of Azerbaijan expenditures for IBRD Loan Number 8068 AZ (bank payments) I. Civil works 2. Goods {6,917,766) (343,650) (6,917,766) (343,650) Total Government of Azerbaijan expenditures (11,942,198) (5,492,081) (22,230,315) PHRD Grant (bank payments) 3. Consultants' services 4. Training 5. Incremental Operating Costs (450) (356,681) (6,442) (25,284) (2,700,981 ) (16,071) (45,829) Total PHRD Grant expenditure (bank payments) (450) (388,407) (2,762,881) PHRD Grant (cash payments) 4. Training (4,441) Total PHRD Grant expenditure (cash payments) (4,441) TOTAL EXPENDITURE (22,258,743) ( 16,826,666) (57,989,650) EXCHANGE DIFFERENCE IDA Designated Account 4209 AZ Cash in hand PHRD Grant Account Project Account (139) (102) 450 782 573 (202) (313) (5,088) 415 (429) 137 I, 155 Total exchange difference 991 (5,030) 1,278 CLOSING BALANCE IDA Designated Account 4209 AZ IDA Designated Account 4961 AZ IBRD Designated Account 8068 AZ Cash in hand PHRD Grant Account Project Account 265,710 1,837,120 598 16,739 592,863 14,166 119,344 178,285 TOTAL CLOSING BALANCE 2,120,167 904,658 Project Director Azer Jafarov September 20, 2013 Baku, the Republic of Azerbaijan September 20, 2013 Baku, the Republic of Azerbaijan The notes on pages 18-24 form an integral part of these special-purpose financial statements. 7

STATEMENT OF PROJECT ACTIVITIES FOR THE YEAR ENDED DECEMBER 31, 2012 Project Components/ Activities Year ended Year ended Cumulative December 31, December 31, December 31, 2012 2011 2012 1 Strengthening the Management Capacity of Judicial Institutions Goods Provision of ICT and other equipment for creation of automated case and document management systems 1,475,921 3,983,823 5,459,744 Procurement of software and hardware for Judicial- Legal Council 99,590 Procurement of hardware for selection of judges 98,480 Subtotal 1,475,921 3,983,823 5,657,814 Consultant Services International consultancy on functional analysis of the Ministry of Justice 91,120 Local consultancy on functional design analysis of the Ministry of Justice 42,445 Training of Ministry of Justice staff in ICT 426,755 5,001 431,756 International IT expert on preparation of ICT master plan, technology platform design, development 10,020 153,899 National IT expert on preparation of ICT master plan, technology platform design and development 23,806 142,347 341,171 Technical Assistance to Strengthen the Judicial- Legal Council 166,556 201,330 Subtotal 450,561 323,924 1,261,721 Training Training and study tours for the Ministry of Justice personnel 8,381 5,084 384,400 Subtotal 8,381 5,084 384,400 Total Strengthening the Management Capacity of Judicial Institutions 1,934,863 4,312,831 7,303,935 2 Court Facility and Technology Civil works Construction of Sheki Court Complex consisting of 4 buildings (Sheki Appeal Court, Sheki Grave Crime) 6,890,526 6,890,526 Construction of Sabunchu Court complex consisting of 2 buildings (Baku City Sabunchu District Court) 5,203,440 5,203,440 Construction of Baku City Yasamal District Court 1,873,576 3,526,429 7,719,499 Construction of Gadabay District Court 782,047 1,204,870 1,949,409 Construction of Oguz District Court 473,138 932,266 2,827,793 Construction of Ganja City Nizami District Court 1,344,244 1,105,585 3,523,527 Subtotal 16,566,971 6,769,150 32,587,199 8

STATEMENT OF PROJECT ACTIVITIES FOR THE YEAR ENDED DECEMBER 31,2012 (Continued) Project Components/ Activities Goods Procurement of software and hardware for Supreme Court Procurement of software and hardware for Constitutional Court Provision of ICT and other technical equipment for Oguz District Court #2 Provision of ICT and other technical equipment for Gedabay District Court Provision of ICT and other technical equipment for Gandja City Nizami District Court #2 Procurement of technical equipment for Yasamal District Court Provision of ICT and other technical equipment for courts in Baku, Gedebey, Oghuz and Ganja Provision of office equipment, furniture and materials in courts Year ended December 31, 2012 124,868 128,107 234,355 421,327 225,894 171,842 Year ended December 31, 2011 71,525 1,493,083 1,617,937 Cumulative December 31, 2012 1,065,364 1,031,982 124,868 128,107 234,355 759,830 1,718,977 1,789,779 Subtotal 1,306,393 3,182,545 6,853,262 Consultant Services Project design for renovation and construction of courts Additional works for carrying out project design for renovation and construction of courts Support for continuing supervision of rehabilitation and construction Carrying out author supervision for courts under renovation and construction Carrying out additional design works 429,810 81,600 184,994 93,629 35,681 1,474,158 1,873,167 238,440 118,954 118,737 Subtotal 511,410 314,304 3,823,456 Incremental Operating Costs Project design for renovation and construction of courts Additional works for carrying out project design for renovation and construction of courts 1,866 1,332 Subtotal 3,198 Total Court Facility and Technology 18,384,774 10,265,999 43,267,115 3 Strengthening Professionalism of Judges and Consultant Services Technical Assistance to Strengthen the Judicial Legal Council Justice Academy needs assessment, strategic planning and development of operating procedures 56,489 108,843 56,489 214,799 Subtotal 165,332 271,288 Incremental Operating Costs Translation, editing and printing of books into Azerbaijani language 21,416 21,416 Subtotal 21,416 21,416 9

STATEMENT OF PROJECT ACTIVITIES FOR THE YEAR ENDED DECEMBER 31,2012 (Continued) Project Components/ Activities Year ended December 31, 2012 Year ended December 31, 2011 Cumulative December 31, 2012 Total Strengthening Professionalism of Judges and Staff 186,748 292,704 4 Improvement of Citizen Information Goods Provision of ICT and other computer equipment for the Ministry of Justice Registry Offices Provision of communication and printing equipment for the Ministry of Justice Registry Offices Procurement of hardware for creation of court acts database Development and implementation of e-notary system 699,153 27,484 988,941 307,500 75,173 130,048 1,688,094 Subtotal 699,153 1,016,425 2,200,815 Consultant Services Database developer (programmer) Integration of civil service acts system and archive Designing and implementing modernization and automatization of MOJ Central and Regional Registry offices Preparation of technical specifications for e-notary system Development of public information strategy for judicial information campaign (TV, radio, print, media) Identification of information needs of target groups (such as IDPs, women, minors, low-income families) Development of internet based information services including design of website to enable the public access Carry out of empirical studies and surveys Carry out of baseline survey Creating legal and judicial information centre in Baku and Guba cities 205,365 21,750 149,131 8,334 115,199 8,334 32,749 383,815 84,304 205,365 112,334 87,008 15,829 84,461 326,195 Subtotal 376,246 123,533 1,340,394 Total Improvement of Citizen Information 1,075,399 1,139,958 3,541,209 5 Project Management Goods Provision of ICT equipment for the Judicial Modernization Team Procurement of office furniture for the Judicial Modernization Team Provision of third vehicles for the Judicial Modernization Team Provision of vehicles for the Judicial Modernization Team 23,809 49,117 11,651 23,309 71,650 Subtotal 23,809 156,227 10

STATEMENT OF PROJECT ACTIVITIES FOR THE YEAR ENDED DECEMBER 31,2012 (Continued) Project Components/ Activities Consultant Services Results collection, reporting, monitoring and evaluation ICT equipment (including accounting software) for the Judicial Modernization Team Remunerations Project Audit Year ended Year ended December 31, December 31, 2012 2011 5,156 268,975 348,746 45,043 37,687 Cumulative December 31, 2012 5,156 12,432 I,24 1,427 120,459 Subtotal 319,174 386,433 1,379,474 Training Training expenditure 56,536 10,193 96,747 Subtotal 56,536 10,193 96,747 Incremental Operating Costs Operating costs Fencing of Guba District Court Petrol for vehicles Salaries of the employees 370,712 500,695 20,715 36,070 1,826,360 20,715 3,026 41,638 Subtotal 427,497 500,695 1,891,739 Total Project Management 803,207 921,130 3,524,187 6 Front-end-Fee 60,500 60,500 TOTAL PROJECT ACTIVITIES 22,258,743 16,826,666 57,989,650 *ICT- Information and Communication Technology Project Director Azer Jafarov September 20, 2013 Baku, the Republic of Azerbaijan September 20, 2013 Baku, the Republic of Azerbaijan The notes on pages 18-24 form an integral part of these special-purpose financial statements. II

STATEMENT OF DESIGNATED AND PROJEGT ACCOUNTS FOR THE YEAR ENDED DECEMBER 31,2012 Project Account Designated Designated Grant Designated Cashin Hand AZN-3308-01, Account IDA Account IDA Account Account IBRD Main State 4209USD- 4961 USD- USD-3318-02 USD- Treasury 3318-01 333110184032 3331102840325 Account# 54835252 4835252 2088404 International International International International International Bank of Bank of Bank of Bank of Bank of Azerbaijan Azerbaijan Azerbaijan Azerbaijan Azerbaijan OJSC, Baku OJSC, Baku OJSC, Agdash OJSC, Baku OJSC, Agdash branch, Main branch branch branch branch State Treasury Agency Opening balance as at January 1, 2011 30,693 1,483,857 1,229 2,202 Add: Project funds received 5,698,245 10,010,023 506,835 Other funds received 3,270 Cash withdrawal 62,000 Transfer from the Project Account to the IDA Designated Account (56,754) Total receipts 5,644,761 10,010,023 506,835 62,000 Deduct: Project eligible expenditure (5,492,081) ( 10,896,344) (388,407) Cash withdrawal (62,000) Cash expenditure (49,834) Transfer from the Project Account to the IDA Designated Account 56,754 Total deductions (5,492,081) (10,901,590) (388,407) (49,834) Effect of exchange rate IDA share Credit Number 4209 AZ 573 Government share (5,088) PHRD Grant Account (313) Cash in hand (202) Total effect of exchange rate (5,088) 573 (313) (202) Closing balance as at December 31,2011 178,285 592,863 119,344 14,166 Add: Project funds received/ (refunded) 11,720,821 (13,121) 2,700,718 (122,946) 9,167,634 Other funds received 2,226 13,379 948 3,602 Cash withdrawal 78,873 Cash reimbursement to the Designated Account 23,744 Transfer to the Project Account from the IDA Designated Account 56,823 Total receipts 11,779,870 24,002 2,701,666 (119,344) 9,167,634 78,873 12

STATEMENT OF DESIGNATED AND PROJECT,:,,,;.;::.oUNTS FOR THE YEAR ENDED DECEMBER 31,2012 (Continued) Project Account AZN-3308-01, Main State Treasury Account# 2088404 Designated Account USD-3318-01 Designated Account IDA 4961 USD- 333110184032 54835252 Grant Account USD-3318-02 Designated Account IBRD USD- 3331102840325 4835252 Cashin Hand International Bank of Azerbaijan OJSC, Baku branch, Main State Treasury Agency International Bank of Azerbaijan OJSC, Baku branch International Bank of Azerbaijan OJSC, Agdash branch International Bank of Azerbaijan OJSC, Baku branch International Bank of Azerbaijan OJSC, Agdash branch Deduct: Project eligible expenditure Transfer from the IDA Designated Account to the Project Account Cash withdrawal Cash expenditure (I I,942, 198) (549,023) (2,348,956) (56,823) (10,880) (87,000) (450) (7,325,777) (4,737) (92,339) Total deductions (11,942,198) (616,726) (2,435,956) (450) (92,339) Effect of exchange rate IDA share 4209 AZ Govern ment share PHRD Grant Account Cash in hand 782 (139) 450 (102) Total effect of exchange rate 782 (139) 450 (102) Closing balance as at December 31, 2012 16,739 265,710 1,837,120 598 Project Director Azer Jafarov September 20, 2013 Baku, the Republic of Azerbaijan The notes on pages 18-24 form an integral part of these fi nancial statements. 13

STATEMENT OF EXPENDITURE AND SUMMARY SHEET WITHDRAWAL SCHEDULE FOR THE YEAR ENDED DECEMBER 31,2012 IDA Credit Number 4209 AZ For the period since the inception date to December 31, 2012 Application No. Advance Category 1 Category 2 Category 3 Category4 Category 5 Total Total payment Civil works Goods Consultants' Training IOC Required Replenished/ services (refunded) reimbursed as at December 31, 2010 2,000,000 5,091,171 2,569,652 3,124,651 111,367 827,960 13,724,801 13,090,785 13 1,553,821 225,103 36,208 1,815,132 1,815,124 14 589,614 992,173 250,877 158,188 1,990,852 1,990,845 15 248,245 1,639,015 15,097 34,954 1,937,311 1,937,305 16 1,151,927 562,675 43,386 33,934 1,791,922 1,791,915 17 472,983 984,451 229,544 65,162 1,172,140 1,172,132 18 (580,000) 435,144 210,777 5,084 60,198 711,203 711,196 19 (92,511) 499,929 103,541 3,751 76,802 591,512 591,506 reimbursed during the year ended December 31,2011 (672,511) 2,897,913 6,232,064 1,078,325 8,835 465,446 10,010,072 10,010,023 reimbursed as at December 31,2011 1,327,489 7,989,084 8,801,716 4,202,976 120,202 1,293,406 23,734,873 23,100,808 20 (690,237) 681,136 9,101 690,237 21 (638,031) 401,541 149,667 8,381 78,442 638,031 Ran :RN000000228510 (refund application) (13,121) (13,121) (13,121) reimbursed/(refund ed) during the year ended December 31,2012 (1,328,268) 1,082,677 136,546 8,381 87,543 1,315,147 (13,121) reimbursed as at December 31, 2012 *(779) 7,989,084 9,884,393 4,339,522 128,583 1,380,949 25,050,o20 23,087,687 * Exchange rate difference on cash exchange 14

STATEMENT OF EXPENDITURE AND SUMMARY SHEET WITHDRAWAL SCHEDULE FOR THE YEAR ENDED DECEMBER 31, 2012 (Continued) IDA Credit Number 4961 AZ For the period since the inception date to December 31, 2012 Application No. Advance Category Category 2 Category 3 Category Category 5 Total Total payment 1 4 Required Replenished Civil Goods Consultants' Training IOC works services reimbursed as at December 31, 2011 1 1,000,000 1,000,000 999,993 2 675,987 115,221 23,465 87,535 902,208 902,201 3 592,667 29,838 176,078 798,583 798,524 reimbursed during the year ended December 31,2012 1,000,000 675,987 707,888 53,303 263,613 2,700,791 2,700,718 reimbursed as at December 31, 2012 1,000,000 675,987 707,888 53,303 263,613 2,700,791 2,700,718 15

STATEMENT OF EXPENDITURE AND SUMMARY SHEET WITHDRAWAL SCHEDULE FOR THE YEAR ENDED DECEMBER 31,2012 (Continued) IBRD Loan Number 8068 AZ For the period since the inception date to December 31,2012 Application No. Advance Direct Category 1 Category 2 Total Total payment funding Required Replenished Civil works Goods reimbursed as at December 31, 2011 Front end fee 60,500 60,500 60,500 2 1,228,077 1,228,077 1,228,070 3 885,714 342,263 1,227,977 878,806 4 3,143,212 3,143,212 3,143,205 5 2,205,108 2,205,108 2,205,101 6 776,468 13,240 789,708 440,536 7 1,211,423 1,211,423 1,211,416 reimbursed during the year ended December 31,2012 2,500,000 5,348,320 1,662,182 355,503 9,866,005 9,167,634 reimbursed as at December 31, 2012 2,500,000 5,348,320 1,662,182 355,503 9,866,005 9,167,634 16

STATEMENT OF EXPENDITURE AND SUMMARY SHEET WITHDRAWAL SCHEDULE FOR THE YEAR ENDED DECEMBER 31,2012 (Continued) PHRD Grant TF056731AZ For the period since the inception date to December 31, 2012 Application No. reimbursed as at December 31,2009 Advance payment 350,000 Category 1 Category 2 Category 3 Civil Goods Consultants' works services 651,963 Category 4 Training 9,139 Category 5 IOC Total Required 1,011,102 Total Replenished 976,521 04 05 06 07 327,376 350,000 348,019 350,000 1,483 1,981 328,859 350,000 350,000 350,000 328,859 350,000 350,000 350,000 reimbursed during the year ended December 31, 2010 1,375,395 3,464 1,378,859 1,378,859 reimbursed as at December 31, 2010 350,000 2,027,358 12,603 2,389,961 2,355,380 08 09 10 (100,000) (81,000) (39,000) 331,718 245,009 132,493 10,748 2,601 4,288 242,466 166,610 97,781 242,460 166,602 97,773 reimbursed during the year ended December 31, 2011 (220,000) 709,220 17,637 506,857 506,835 reimbursed as at December 31, 2011 130,000 2,736,578 30,240 2,896,818 2,862,215 11 Refunded (10,656) (122,946) 10,656 (122,946) (122,946) reimbursed during the year ended December 31, 2012 (133,602) 10,656 (122,946) (122,946) reimbursed as at December 31, 2012 2,747,234 30,240 2,773,872 2,739,269 ~ I Project Director Azer J afarov September 20, 2013 September 20, 2013 Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan The notes on pages 18-24 form an integral part of these special-purpose financial statements. 17

NOTES TO THE SPECIAL PURPOSE FINANCIA.L ~:.TATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2012 1. DESCRIPTION OF THE PROJECT On October 3, 2006, the Republic of Azerbaijan ("Recipient") and the International Development Association (the "Association") have agreed to extend to the Recipient, on the terms and conditions set forth or referred to in the credit agreement, a credit facility in the amount equivalent to 14,800,000 Special Drawing Rights (SDR 14,800,000) (the "Credit") to assist in financing the project described in Schedule 1 to the Agreement (the "Project"). On November 22, 2011 the Recipient and the Association entered into new credit agreement (4961 AZ) in the amount of SDR 5,800,000. Also at the same date the Recipient has concluded another credit agreement with the International Bank for Reconstruction and Development (the "Bank") (8068 AZ) in the amount of USD 24,200,000 (the "Loan") respectively, for the purpose of providing additional financing for activities related to the initial project, which was prolonged until June 30, 2013. Unpaid invoices suspended from the initial project are financed from new credit agreements. The closing date of new credit agreements is December 31, 2014. The objective of the Project is to develop capacity of the Recipient's judicial system to achieve incremental improvements in efficiency, citizen information and its ability to handle future demand. The Project consists of the following parts: Component 1: Strengthening the Management Capacity of Judicial Institutions (a) (b) (c) (d) (e) (f) Development and installation of an integrated system for management decision making and planned processes aimed at enhancing operational effectiveness, through the carrying out of works and the provision of goods, consultants' services and training. Design and implementation of an information network between the Judicial-Legal Council (the "JLC") and other public institutions for promoting communication and coordination mechanisms. Provision of ICT and other technical equipment to the JLC, pilot courts and other justice institutions for the creation of automated case and document management systems and an information network. Capacity building for judges and staff through the provision of training in ICT systems. Capacity building for the Ministry of Justice (the "MOJ") and the JLC on court system modernization, including a court performance measurement and management framework. Capacity building for the Judicial Modernization Team to implement the Project, including planning and supporting of stakeholder participation. Component 2: Upgrading of Court Facilities and Technologies (a) (b) Upgrading of courthouses in accordance with the international standards through: (i) the carrying out of court renovation, rehabilitation and construction of selected courts including the provision of office equipment, and supervision of the construction; and (ii) the provision and installation of office equipment and furniture for selected courts. Upgrading of technologies for the courts through: (i) the design, testing and implementation of automated case management systems for the demonstration purposes; and (ii) provision of information, communication and technology and other technical equipment to the courts that are constructed and rehabilitated under Component 2 (a) above. 18

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,2012 (Continued) Component 3: Improve Quality of Operations of Judges, Staff and Other Legal Professionals (a) (b) (c) (d) (e) (f) (g) Capacity building of training through: (i) the development of a faculty of permanent and parttime professors and formalization of twinning arrangements with international training institutions; and (ii) the development of training Development of professional skills and capabilities of new and senior judges, court chairmen, deputy court chairmen, staff and legal professionals through the provision of training. Improvement of quality of services delivered by judges, staff and legal professionals through diagnostic work and provision of policy options. Preparation and facilitation of annual judicial conferences in order to evaluate impacts, exchange views and share experiences for further learning. Development of a case-file analysis. Carrying out an assessment of the current functions and performance of the bar association. Development of courseware for the Justice Academy based on a training needs assessment. Component 4: Improving Citizen Information and Access to Justice (a) (b) (c) Identification of information needs of target groups; and development of pilot citizen information and outreach programs, including information campaigns to inform citizens about the modernization program of the judicial system and evaluation of pilot citizen information programs, through the provision of consultants' services, goods and training. Upgrading of the registries' and notaries' functions, through: the review and updating of the organization and functioning of notaries, computerization of the certification and information collection services, including provision of information and communication technologies and office equipment. Identification of other impediments to access to justice through empirical and analytical work and provision of policy options through the provision of consultants' services through: (i) an analysis of the legal aid system; (ii) an analysis of the market for legal services; (iii) the development of the second phase of the e-notary system; (iv) an empirical analysis of court dispute resolution and alternative dispute resolution mechanisms; (v) an analysis of the court enforcement system; (vi) carrying out outreach activities for public awareness; and (vii) the development of a justice sector performance measurement framework. Component 5: Project Management Strengthening the capacity of the Judicial Modernization Team in management, monitoring and coordination including Project audit, through the provision of goods, consultants' services, and Training, and financing of Incremental Operating Costs. The credit agreement 4209 AZ was intended to finance building of four modern courts in Ganja, Gadabay, Oguz and Baku (Yasamal). As at December 31, 2011 certain position of the invoices were not paid to suppliers due to over commitment which has occurred by the Project. The credit agreement 4961 AZ and Loan agreement 8068 AZ were intended to finance building of two modern court buildings area in Sheki, Baku (Sabunchu District) and one court building in Guba. 19

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 20'12 (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Statement of compliance The Special-Purpose Financial Statements have been prepared on the cash basis of accounting in conformity with the International Public Sector Accounting Standards ("IPSAS") "Financial Reporting under the Cash Basis of Accounting" issued by the Public Sector Committee of the International Federation of Accountants ("IFAC-PSC") and incorporate the principal accounting policies from the "Guidelines: Annual Financial Reporting and Auditing for World Bank Financed Activities". Other basis of preparation criteria The Special-Purpose Financial Statements are prepared under the historical cost basis of accounting. Source funding and government contributions are recognized when the related cash is received or paid out on the Project's behalf. Expenditure are accounted for on the basis of actual disbursement of funds from the Project accounts. Foreign currency transactions and translation The Project uses the United States Dollar ("USD") as its functional currency for the following reasons: a) The Association's and Bank's funding is received in USD; b) A substantial share of the Project's expenditure is denominated in USD; and c) Budgets and financial reports for the Project are prepared in USD. Balance sheet monetary items denominated in currencies other than USD have been translated into USD using the exchange rate of the Central Bank of the Republic of Azerbaijan ("CBRA") effective as at appropriate date. All income and expense transactions denominated in currencies other than USD are converted into USD using the exchange rate of the CBRA prevailing on the date of transaction. 3. CASH AT BANK AND IN HAND IDA Credit Number 4209 AZ IDA Designated Account USD IDA Credit Number 4961 AZ IDA Designated Account USD IBRD Loan Number 8068 AZ IBRD Designated Account USD PHRD Grant Account USD Project Account AZN Cash in hand AZN TOTAL CASH AT BANK AND IN HAND December 31, December 31, 2012 2011 265,710 1,837,120 592,863 119,344 16,739 178,285 598 14,166 2,120,167 904,658 20

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,2012 (Continued) 4. DESIGNATED ACCOUNT The Recipient has established a Designated Accounts separately at a commercial bank acceptable to the Association and the Bank in accordance with the credit and loan agreements. Designated Accounts are established, managed, replenished and liquidated in accordance with the World Bank's "Disbursement Guidelines for Projects" dated September 2006 and detailed arrangements agreed upon between the Recipient and the Association and the Bank. The Project maintains its Designated Accounts in USD with the International Bank of Azerbaijan, Baku and Agdash branches (located in the Republic of Azerbaijan). 5. PREPAYMENTS Prepayments in the balance sheet represent the amounts spent for eligible expenditures but not yet supported with the act of acceptance for the services and goods receipt notes for the goods received. 6. CONTRACTUAL COMMITMENTS As at December 31, 2012 total contractual commitments amounted to USD 27,828,585. During the year ended December 31, 2012, four addendums were made to existing contracts related to the construction of the courts in the amount of USD 3,561,013 which was agreed to be financed by Government of the Republic of Azerbaijan. The Bank has issued "No Objection" to these addendums on August 1, 2012. The contractual commitments per expenditure categories were as follows: Category Amount in USD (1) Ci vii Works (2) Goods (3) Consultants' services TOTAL AMOUNT 25,298,250 1,749,327 781,008 27,828,585 7. BASIS OF FUNDING AND ELIGffiLE EXPENDITURE The following table specifies the categories of eligible expenditure that may be financed out of the allocations of the amounts of the Credit Number 4209 AZ to each category, and the percentage of expenditure to be financed for eligible expenditure in each category: Category (1) Civil Works (2) Goods (3) Consultants' services (4) Training (5) Incremental operating costs TOTAL AMOUNT December 31,2012 December 31,2011 Amount of the Credit allocated (expressed in SDR) 6,600,000 5,014,000 2,520,000 180,500 485,500 14,800,000 Percentage of expenditure to be financed Amount of the Credit allocated (expressed in SDR) 55% 6,600,000 79% 5,014,000 I 00% 2,520,000 100% 180,500 100% 485,500 -----'-- 14,800,000 Percentage of expenditure to be financed 55% 79% 100% 100% 100% 21

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,2012 (Continued) The following table specifies the categories of eligible expenditure that may be financed out of the allocations of the amounts of the Credit Number 4961 AZ to each category, and the percentage of expenditure to be financed for eligible expenditure in each category: Category (1) Civil Works (2) Goods (3) Consultants' services including Audits and Trainings (5) Incremental operating costs Unallocated TOTAL AMOUNT December 31,2012 Amount of the Percentage of Credit expenditure to allocated be financed (expressed in SDR) 200,000 60% 2,700,000 60% 2,100,000 500,000 300,000 5,800,000 100% 100% December 31, 2011 Amount of the Percentage of Credit expenditure to allocated be financed (expressed in SDR) The following table specifies the categories of eligible expenditure that may be financed out of the allocations of the amounts of the Loan Number 8068 AZ to each category, and the percentage of expenditure to be financed for eligible expenditure in each category: Category December 31,2012 (1) Works including nonconsulting (2) Goods (3) Consultants' services including Audit (6) Front-end Fee Interest Rate Cap or Interest Rate Collar premium Amount of the Loan allocated (expressed in USD) 20,739,500 3,200,000 200,000 60,500 Percentage of expenditure to be financed 60% 60% 100% 0.25% of the Loan amount Premium to be paid out of the proceeds of the Loan Amount of the Loan allocated (expressed in USD) December 31,2011 Percentage of expenditure to be financed TOTAL AMOUNT 24,200,000 8. METHOD OF DISBURSEMENT The methods of disbursement used from the inception of the financing up to and including December 31, 2012 and 2011 were as follows: Advance - the Association may advance loan proceeds into the Designated Account of the Recipient to finance eligible expenditure as they are incurred and for which supporting documents will be provided at a later date. Direct Funding- the Association may make payments, at the Recipient's request, directly to a third party for eligible expenditure. 22

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2012 (Continued) Reimbursement procedure - the Association may reimburse the Recipient for expenditure eligible for financing pursuant to the credit agreement ("eligible expenditure") that the Recipient has prefinanced from its own resources. Commitment procedure - the Association may pay amounts to a third party for eligible expenditure under special commitments entered into, in writing, at the Recipient's request and on terms and conditions agreed between the Association and the Recipient. 9. METHOD OF WITHDRAWAL IDA Designated Accounts Designated Accounts are designated disbursement accounts of the Project to effect the payment of eligible expenditure, within defined limits, which do not require individual authorization from the Association. Available amounts were drawn down within the limits determined by the relevant credit agreement for the payment of eligible expenditure for sub-contractors from the Designated Accounts. During the reporting period tender fees were received to the IDA Designated Account Credit Number 4961 amounted to USD 968 (2011: USD nil). Direct payments from the IDA Designated Account Under this method, the Project management prepares applications based on supporting documents which are submitted to the Association. Payments are made from the Credit Account directly to the contractors. No direct payments were made for the reporting period ended December 31, 2012 and 2011. Direct payments from the IBRD Designated Account Under this method, the Project management prepares applications based on supporting documents which are submitted to the Bank. Payments are made from the Loan Account directly to the contractors. The Bank made direct payments for the Project in the total amount of USD 5,348,320 (20 11: nil) for the reporting period ended December 31, 2012. Project Account The Project maintains a separate account in the State Treasury Agency where the Government funds are accumulated. The funds are further disbursed to sub-contractors based on the shares of expenditure to be incurred by each funding source. During the reporting period tender fees of USD 2,226 (2011: USD 3,270) accumulated in the Project Account. Statement of expenditure ("SOE") Under the SOB method, the Project forwards to the Association an application for reimbursement of payments already made using an application for withdrawal with SOB forms as the only documentation. 23

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2012 (Continued) Cash in hand During the reporting period to cover miscellaneous expenditure, the Project management has withdrawn cash amounting to USD 10,880 (2011: USD 62,000), USD 87,000 (2011: nil) and USD 4,737 (2011: nil) from the IDA Designated Account for Credit Number 4209 AZ, IDA Designated Account for Credit Number 4961 AZ and IBRD Loan Number 8068 AZ, respectively. The withdrawn amounts have been converted into AZN and disbursed further to fund the Project expenditure. The mentioned transactions are segregated from the other transactions. The unused balance of the withdrawn cash is kept in the cash box. 10. OPERATING ENVIRONMENT The Project's principal business activities are within the Republic of Azerbaijan. Laws and regulations affecting entities operating in the Republic of Azerbaijan are subject to rapid changes and the Project's operations could be at certain level of risk due to changes in the political and business environment. 24