Second National Water Supply and Sanitation Project Implementation Unit under State Amelioration and Water Management Open Joint Stock Company

Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Second National Water Supply and Sanitation Project Implementation Unit under State Amelioration and Water Management Open Joint Stock Company International Development Association Credit No 4397 AZ International Bank for Reconstruction and Development Loan No 7518 AZ International Bank for Reconstruction and Development Loan No 8381 AZ Special Purpose Project Financial Statements for the year ended 31 December 2015 and Auditors' Report Public Disclosure Authorized

under State Amelioration and Water Management OJSC International Development Association Credit No 4397AZ International Bankfor Reconstruction and Development Loan No 7518 AZ Contents CONTENTS Page Independent Auditors' Report 3 Statement of Financial Position 5 Statement of Sources and Uses of Funds 6 Statement of Project Activities 8 Statement of Special and Project Accounts 9 Notes to the Special Purpose Project Financial Statements 10

"KPMG Audit Azerbaijan" LLC Port Baku South Tower 153 Neftchilar Avenue AZ1010, Baku, Azerbaijan Telephone +994 12 404 89 10/11 Fax +994124048914 Internet www.kpmg.az Independent Auditors' Report To the Management of Second National Water Supply and Sanitation Project Implementation Unit under State Amelioration and Water Management OJSC We have audited the accompanying special purpose project financial statements of Second National Water Supply and Sanitation Project Implementation Unit under State Amelioration and Water Management OJSC (the "Project") financed by International Development Association (the "IDA"), International Bank for Reconstruction and Development (the "IBRD") and the Government of the Republic of Azerbaijan (the "GoA"), which comprise the statement of financial position as at 31 December 2015, the statement of sources and uses of funds, statement of project activities, statement of special and project accounts for the year then ended, and a summary of significant accounting policies and other explanatory notes (collectively referred to as the "special purpose project financial statements"). The special purpose project financial statements have been prepared by Management of the Project based on the financial reporting provisions of International Public Sector Accounting Standards "Financial Reporting under the Cash Basis of Accounting" ("IPSAS") and in conformity with the World Bank's Financial Management Sector Board's "Guidelines: Annual Financial Reporting and Auditing for World Bank-Financed Activities" (the "World Bank Guidelines") as described in Note 2 to the special purpose project financial statements. Management's Responsibility for the Special Purpose Project Financial Statements Management is responsible for the preparation and fair presentation of these special purpose project financial statements in accordance with the financial reporting provisions of International Public Sector Accounting Standards "Financial Reporting under the Cash Basis of Accounting" and World Bank Guidelines, and for such internal control as management determines is necessary to enable the preparation of the special purpose project financial statements that is free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these special purpose project financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the special purpose project financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the special purpose project financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of "KPMG AuditAzerbaijan" Limited Liability Company, incorporated under the laws and acting in the Republic of Azerbaijan, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International') a SwiAss entity

under State Amelioration and Water Management OJSC Independent Auditors' Report Page 2 material misstatement of the special purpose project financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Project's preparation and fair presentation of the special purpose project financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Management's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates, if any, made by management, as well as evaluating the overall presentation of the special purpose project 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 project financial statements present fairly, in all material respects, the financial position of the Project as at 31 December 2015 and its sources and uses of funds for the year then ended in accordance with the International Public Sector Accounting Standard: Financial Reporting Under the Cash Basis of Accounting and the World Bank Guidelines. Other matter The special purpose project financial statements of the Project as at and for the year ended 31 December 2014 were audited by another auditor who expressed an unmodified opinion on those statements on 20 June 2015. Basis of Accounting and Restriction on Distribution and Use Without modifying our opinion, we draw attention to Note 2 of the special purpose project financial statements which describes the basis of accounting. The special purpose project financial statements are prepared to assist the Project to meet the requirements of loan agreements. As a result, the special purpose project financial statements may not be suitable for another purpose. Our report is intended solely for Management of the Project, the GoA, the IBRD, and the IDA and should not be distributed to or used by other parties het n these specified parties. 47 6 KPMG Aui.A.erba.j. i LC 22 November 2016 Baku, the Republic of Azerbaijan

State Amelioration and Water Management OJSC Statement offinancial Position as at 31 December 2015 USD Dollars Assets and Cumulative Expenditure Cash at bank Cumulative project expenditure 2015 2014 3 3,375,833 1,037,006 396,911,083 336,090,066 400,286,916 337,127,072 Sources of Funds 400,400,093 337,140,892 Project financing Accumulated foreign exchange difference 113,177) (13,820) 400,286,916 337,127,072 The special purpose project financial statements were approved by the management of the Project on November 18, 2016 and signed on its behalf by: Ayaz Gahtamiainanov Project Implenentation,.Unit. Head Gumru Hajiyeva Financial Specialist The statement of financial position is to be read in conjunction with the notes to, and forming part of, the special purpose project financial statements set out on pages 10 to 15.

State Amelioration and Water Management OJSC Statement ofsources and Uses offunds for the year ended 31 December 2015 USD Dollars Note 2015 2014 Cumulative Opening Balances IDA Credit 4397 AZ 75,622 991,306 IBRD Loan 7518 AZ 828,156 2,063,319 IBRD Loan 8381 AZ 1 GoA 133,228 23,902 1,037,006 3,078,527 Add: Funds received by sources IDA Credit 4397 AZ (Initial deposits) 4 3,703,184 1,508,729 17,560,04 1 IDA Credit 4397 AZ (Direct payments) 1,017,814 666,440 2,416,177 IBRD Loan 7518 AZ (initial deposits) 4 7,880,663 2,827,073 29,208,633 IBRD Loan 7518 AZ (Direct payments) - 43,464,620 178,112,435 IBRD Loan 8381 AZ (Direct payments) 28,921,871 375,000 29,296,871 GoA 21,735,669 28,777,225 143,716,743 Other (tender fees) - - 99,643 63,259,201 77,619,087 400,410,543 Less: Refund of unused GoA share - - (10,450) - (10,450)_ Add/(Less):Exchange differences (4,053) (490) (32,036) IDA Credit 4397 AZ (,5)(9)(206 IARD Loan 7518 AZ (32,639) (5,062) (14,860) IBRD Loan 8381 AZ GoA (62,665) (847) (66,691) Other (tender fees) - 410 (99,357) (6,399) (113,177) Less: Expenditures IDA Credit 4397 AZ. Consulting services (3,220,657) (2,718,508) (16,338,907) Incremental operating costs (366,122) (371,855) (2,423,159) Transfer fee for IDA funds (33) (3,586,779) (3,090,363) (18,762,099) IBIRD Loan 7518 AZ. Goods (6,542,307) (47,521,794) (204,765,301) Front end Fee (383,329) (6,542,307) (47,521,794) (205,148,630) IBRD Loan 8381 AZ Goods (28,921,871) - (28,921,871) Front end Fee -(375,000) (375,000) (28,921,871) (375,000) (29,296,871) G oa Goods (19,805,844) (26,986,349) (133,416,339) Consulting services (1,826,346) (1,551,143) (9,328,287) Incremental operating costs (137,870) (129,560) (858,804) n(21,770,060) (28,667,052) (143,603,430) Other sources (tender fees) Incremental operating costs (100,053) - (100,053) TOTAL EXPENDITURE (60,821,017) (79,654,209) (396,911,083) The statement of sources and uses of funds is to be read in conjunction with the notes to, and forming part of, the special purpose project financial statements set out on pages 10 to 15.

USD Dollars Second National Water Supply and Sanitation Project Implementation Unit State Amelioration and Water Management OJSC Statement of Sources and Uses offunds for the year ended 31 December 2015 Note 2015 2014 Cumulative Closing Balances IDA Credit 4397 AZ 3 1,205,788 75,622 1BRD Loan 7518 AZ 3 2,133,873 828,156 IBRD Loan 8381 AZ 3 3 1 GoA 3 36,172 133,228 3,375,833 1,037,006 The special purpose project financial statements were approved by the management of the Project on November 18, 2016 and signed on its behalf by: Ayaz Gahramanov Project Implementatio'n Unit Hoa-d Gumru Hajiyeva Financial Specialist The statement of sources and uses of funds is to be read in conjunction with the notes to, and forming part of, the special purpose project financial statements set out on pages 10 to 15.

State Amelioration and Water Management OJSC International Development Association Credit No 4397AZ Statement of Project Activities for the year ended 31 December 2015 USD Dollars 2015 2014 Cumulative Component A. Rayon Investment A.1 Main Investments 55,270,022 74,508,143 367,095,228 A.2 Consulting Services 5,047,003 4,237,825 25,570,356 60,317,025 78,745,968 392,665,584 Component C. Project Implementation and Management 503,992 533,241 3,487,170 Component Front-end Fee 375,000 758,329 60,821,017 79,654,209 396,911,083 The special purpose project financial statements were approved by the management of the Project on November 18, 2016 and signed on its behalf by: Ayaz Gahramanov u', I Gumru Hajiyeva Project Implermenfation.Unit Hea / Financial Specialist The statement of project activities is to be read in conjunction with the notes to, and forming part of, the special purpose project financial statements set out on pages 10 to 15.

For the year ended 31 December 2015 Second National Water Supply and Sanitation Project Implementation Unit State Amelioration and Water Management OJSC Statement ofspecial and Project Accounts for the year ended 31 December 2015 Special Special IBRD IBRD Project Account Account (USD) (AZN) Account USD Dollars IDA (USD) IDA (AZN) GoA Opening balances 70,264 5,358 826,100 2,056 133,228 Add: Project funds received 3,703,184-7,880,663-21,735,669 Converted from USD account - 1,098,697-6,597,195-3,703,184 1,098,697 7,880,663 6,597,195 21,735,669 Less: Eligible project expenditure 1,480,792 1,088,070 36 6,542,466 21,770,060 Converted into AZN account 1,098,800-6,597,000 - - 2,579,592 1,088,070 6,597,036 6,542,466 21,770,060 Foreign exchange gain/(loss) - (4,053) - (32,639) (62,665) - (4,053) - (32,639) (62,665) Closing balances 1,193,856 11,932 2,109,727 24,146 36,172 For the year ended 31 December 2014 Special Special IBRD IBRD Project Account Account (USD) (AZN) Account USD Dollars IDA (USD) IDA (AZN) GoA Opening balances 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 USD account - 1,067,296-4,047,597-1,508,730 1,067,296 2,827,073 4,047,597 28,777,225 Less: Eligible project expenditure 1,357,582 1,066.428 12 4,060,821 28,667,052 Converted into AZN account 1,067,700-4,049,000 - - 2,425,282 1,066,428 4,049,012 4,060,821 28,667,052 Foreign exchange gain/(loss) (847) - (847) Closing balances 70,264 5,358 826,100 2,056 133,228 The special purpose project financial statements were approved by the management of the Project on November 18, 2016 and signed,on its behalf by: Ayaz GahramanoV, Gumru Hajiyeva Project Implementatioi Unit Head Financial Specialist The statement of special and pioject accounts is to be read in conjunction with the notes to, and forming part of, the special purpose project financial statements set out on pages 10 to 15.

1. Background Second National Water Supply and Sanitation Project Implementation Unit under State Amelioration and Water Management OJSC Notes to the Special Purpose Financial Statements for the year ended 31 December 2015 The Project is directly implemented by the Project Implementation Unit ("PIU") established under the State Amelioration and Water Management OJSC, which is an Implementing Agency. The PrU is not a legal entity. The objective of the Project is to improve the availability, quality, reliability and sustainability of water supply and sanitation services of the Government of the Republic of Azerbaijan (hereinafter 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 Modemisation 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 1. 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. The Project originally included 21 rayons, however, immediately after effectiveness, the Project faced implementation difficulties. These pertained to: (i) insufficient Project preparation caused by the absence of feasibility and environmental studies; (ii) a shortage of funds due to underestimation of investment costs at appraisal caused by limited record of market costs in the water sector, which resulted in a reduction of Project scope; and (iii) the inability of the original implementing agency to implement the massive countrywide water program with multiple donors. These issues were addressed by a level II restructuring approved on September 18, 2009 to transfer the implementation responsibility from Azersu ASC to Azerbaijan Amelioration and Water Management OJSC and level I restructuring approved on November 18, 2011 to downsize the original scope to 8 rayons (i.e. Siyazan, Shabran, Aghsu, Ismayilli, Lerik, Yardimli, Masalli and Jalilabad). 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 10

under State Amelioration and Water Management OJSC Notes to the Special Purpose Financial Statements for the year ended 31 December 2015 ("Borrower") and the International Bank for Reconstruction and Development ("IBRD"). The I3RD 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 (USD 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 Ito the Agreement. The closing date was 28 February 2013. 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"). 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. Amount of Percentage of Expenditures to be Category the Loan Allocated Financed (net of VAT) Wor s (a) For Part A.2 of Project 670,000 75% (b) For Part A.2 of Project30,0 Goods (a) For Part A.1 and 13.1 of the Project. 139,645,000 75% (b) For Part A.2 and B.2 of the Project. 68,780,000 Amount payable pursuant to Section 2.03 of this Agreement in accordance with Section 2.07 (b) of the General Front-end Free 575,000 Conditions Premia for Interest Rate Caps and Interest Rate Amount due under Section 2.07 (c) of Collars - this Agreement Unallocated 20,000,000 Total Amount 230,000,000 b) Financing Agreement with the IDA Credit 4397 AZ A Credit Agreement 4397 AZ dated 16 October 2009 has been signed between the Republic of Azerbaijan ("Borrower") and International Development Association ("Association" or "IDA'). The Association agrees to extend to the Borrower, 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. 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. 11

under State Amelioration and Water Management OJSC Notes to the Special Purpose Financial Statements for the year ended 31 December 2015 Amount of the Percentage of Expenditure to Category Loan Allocated be Financed (net f VAT) (1) Works for Part A.2 of the Project 251,000 (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 (a) for Parts A.1,B.I and C.1 of the Project 1,861,000 (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 Total amount c) Financing Agreement with the IBbD Loan 8381 AZ 1,253,000 18,800,000 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 ("JBRD"). 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 (USD 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. Amount of the Percentage of Expenditures to Category Loan Allocated (USD) be Financed (net of VAT) (1) Goods, works, non- consulting services, and consultants' services, Training and Incremental Operating Costs for the Project 149,625,000 75% Amount payable pursuant to Section 2.03 of this Agreement in accordance with Section 2.07 (b) (2p Front-end Fee 375,000 of the General Conditions Amount due pursuant to Section (3) Interest Rate Cap or Interest Rate Collar premium - 2.07(c) of the Areement Total Amount d) Financing from GoA 150,000,000fl Counterpart financing (25%), as stipulated by all the agreements mentioned above, is to be provided by the Government of the Republic of Azerbaij an. 2. Accounting Policies These special purpose project financial statements cover the part of the project implemented by PU under the State Aelioration FeeC. and Water Management Transactions related to the part of the project implemented by the State Amelioration and Water Management Agency of Nakhchivan Autonomous Republic have been excluded. 12

under State Amelioration and Water Management OJSC Notes to the Special Purpose Financial Statements for the year ended 31 December 2015 a) Basis of Accounting These special purpose project 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 Project 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 2015. 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"). The Project's transactions are funded and used in USD, AZN and EUR. In accordance with the requirements of the World Bank, these special purpose project financial statements are presented in USD, 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 exchange rate set by the Central Bank of Azerbaijan ("CBAR") was 1.5594 (2014: 0.7844) for AZN/USD and 1.7046 (2014: 0.9522) for AZN/EJR. 3. Cash at bank 2015 2014 IDA 4397 Special account 1,205,788 75,622 IBRD 7516 AZ Special Account 2,133,873 828,156 IBRD 8381 AZ Special Account - - GoA Project Account 36,172 133,228 3,375,833 1,037,006 13

under State Amelioration and Water Management OJSC Notes to the Special Purpose Financial Statements for the year ended 31 December 2015 4. Statement of Expenditure (SOE) Withdrawal Schedule IDA Credit No. 4397 AZ. for the year ended 31 December 2015 Application Required for Category Requested Advance/ amount Initial Consultant Incremental Reimbursed Date # deposit Goods Training services costing amount 24/2/2015 10 1,920,978 - - - 1,699,090 221,888 1,920,978 18/9/2015 11 1,782,206 - - - 1,539,977 242,229 1,782,206 Total 3,703,184 - - - 3,239,067 464,117 3,703,184 IDA Credit No. 4397 AZ for the year ended 31 December 2014 Application Required for Category Requested Advance/ amount Initial Consultant Incremental Reimbursed Date # deposit Goods Training services costing amount 1/6/2014 9 1,508,729 - - - 1,290,100 218,629 1,508,729 Total 1,508,729 - - 1,290,100 218,629 1,508,729 IBRD Credit No. 7518 AZ. for the year ended 31 December 2015 Application Required for Category Requested Advance/ amount Initial Consultant Incremental Reimbursed Date # deposit Goods Training services costing amount 2/12/2015 12 2,899,197-2,899,197 - - 2,899,197 18/9/2015 11 2,815,550-2,815,550 - - - 2,815,550 24/2/2015 10 2,165,916-2,165,916 - - - 2,165,916 Total 7,880,663-7,880,663 - - - 7,880,663 IBRD Credit No. 7518 AZ for the year ended 31 December 2014 Application Re uired for Category Requested Advance/ amount Initial Consultant Incremental Reimbursed Date # deposit Goods Training services costing amount 6/1/2014 9 2,827,073-2,827,073 - - 2,827,073 Total 2,827,073-2,827,073 - - - 2,827,073 14

5. Method of Withdrawal a) Designated or Special Account Second National Water Supply and Sanitation Project Implementation Unit under State Amelioration and Water Management OJSC International Development Association Credit No 439 7AZ International Bankfor Reconstruction and Development Loan No 8381 AZ Notes to the Special Purpose Financial Statements for the year ended 31 December 2015 The Special Accounts held with the Kapital Bank ASC in the Republic 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. The Project is authorized to make payments out of the special account exclusively for eligible expenditures in accordance with the provisions of the Financing Agreement. To replenish the designated account the Project furnishes to the requests for deposits into the special account, supporting documents and other evidence verifying that payments in respect of which replenishment is requested are made exclusively for eligible expenditures. The special accounts usually comprise: a) deposits and replenishments received from IDA and IBRD; b) payments substantiated by withdrawal applications; c) the remaining balances at the end of each financial year. b) Direct payments from the Credit Account Under this method, the PIU prepares applications based on supporting documents which are submitted to the IDA and IBRD. Payments are made from the credit account directly to the contractors. c) Project account (GoA) The Project maintains a separate account in Treasury Office No. 12 of the State Treasury Agency under the Ministry of Finance 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 IDA and IBRD 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 The Project does not make publicly available its approved budget, therefore there is not a comparison of budget versus actual amounts. 8. Project status In accordance with the Financing Agreement 8381 AZ dated 22 October 2014 between GoA and 1BRD, the expected date of the Loan's account closing was determined as 31 December 2017. 15