JAMAICA ACCESS TO FINANCE FOR MSMEs PROJECT FINANCIAL STATEMENTS MARCH 31, 2019 JAMAICA ACCESS TO FINANCE FOR MSMEs PROJECT MARCH 31, 2019 Index Page Independent Auditor's Report Statement of Sources and Uses of Funds 3 Statement of Cumulative investments 4 Designated Account Reconciliation 5 Notes to the Financial Statements 6-10 AUDITOR GENERAL'S DEPARTMENT 40 KNUTSFORD BOULEVARD ANY REPLY OR SUBSEQUENT REFERENCE KINGSTON 10 TO THIS COMMUNICATION SHOULD BE JAMAICA ADDRESSED TO THE AUDITOR GENERAL AND NOT TO ANY OFFICER BY NAME Tel. No.: 926-8309/926-5963/926-5846 AND THE FOLLOWING REFERENCE Fax Number: 968-4690 QUOTED. - Email: audgen@auditorgeneral.gov.jm July 30, 2019 GOJ/IBRD LOAN NO. 8822-JM JAMAICA ACCESS TO FINANCE for MSMEs PROJECT FOR THE FIFTEEN-MONTHS ENDING MARCH 31, 2019 AUDIT REPORT ON THE FINANCIAL STATEMENTS OPINION I have audited the accompanying financial statements for the Jamaica Access to Finance for MSMEs Project set out on pages 3 to 10, which comprises the Statement of Sources and Uses of Funds, for the fifteen-months ended March 31, 2019, Statement of Cumulative Investments, Designated Account Reconciliation Statement for the period then ended and a summary of the significant accounting policies and other explanatory notes. In my opinion, the appended financial statements reflect a fair representation of the transactions of the Project for the fifteen-months and the transactions conformed to the terms of the Loan agreement and complied with International Public Sector Accounting Standards (IPSAS) - Cash Basis. BASIS FOR OPINION The audit of the Project was conducted in accordance with: * Article V section 5.09 (b) of the Loan Agreement between the Government of Jamaica (GOJ) and the International Bank for Reconstruction and Development (IBRD) dated March 2, 2018. * International Standards of Supreme Audit Institutions (ISSAIs). My responsibilities under ISSAls are further described in the Auditor's Responsibility for the Audit of the Financial Statements section of this report. My staff and I are independent of the Project in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. I believe that the audit evidence obtained is sufficient and appropriate to provide a basis for my opinion. KEY AUDIT MATTERS Key audit matters are those matters that, in my professional judgment, were of most significance in the audit of the financial statements. There were no key audit matters for the fifteen months ending March 31, 2019. MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The executing agency, the Development Bank of Jamaica, is responsible for the preparation and fair presentation of these financial statements, in accordance with International Public Sector Accounting Standards (IPSAS) - Cash Basis. This responsibility includes designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether, due to fraud or error; selecting and applying appropriate accounting policies. The Agency is also required to present audited financial statements to the IBRD. In preparing the financial statements, management is responsible for assessing the Project's ability to continue as a going concern, disclosing as applicable, matters relating to going concern and using the going concern basis of accounting unless there are plans to liquidate the project or to cease operations, or has no realistic alternative but to do so. AUDITOR'S RESPONSIBILITY FOR THE AUDIT OF THE FINANCIAL STATEMENTS My responsibility is to express an opinion on these Financial Statements based on my audit. I conducted my audit in accordance with the auditing standards issued by the International Organization of Supreme Audit Institutions (INTOSAI). Those standards require that I comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISSAIs will always detect a material misstatement when it exists. Misstatements may arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken based on these financial statements. As part of an audit in accordance with ISSAIs, I exercised professional judgment and maintained professional skepticism throughout the audit. I also: * Identified and assessed the risks of material misstatement of the financial statements, whether due to fraud or error, designed and performed audit procedures responsive to those risks, and obtained audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. * Obtained an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for expressing an opinion on the effectiveness of the Project's internal control. * Evaluated the appropriateness of accounting policies used and related disclosures made by management. * Concluded on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Project's ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in the auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion. The conclusions are based on the audit evidence obtained up to the date of my auditor's report. However, future events or conditions may cause the Project to cease to continue as a going concern. * Evaluated the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that presents a true and fair view. I have communicated with the World Bank regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that was identified during the audit. COMPLIANCE WITH APPLICABLE LAWS, REGULATIONS AND FINANCIAL CLAUSES OF THE LOAN AGREEMENT During the period under review, I examined compliance by the Project Implementing Unit of the Executing Agency with the applicable laws and regulations related to the Programme's financial activities and with the accounting/financial/management clauses of the Loan Agreement No. 8822-JM. There was general compliance with the following articles contained in the Loan Agreement mentioned: Article III - Section 3.0 1: Article V of the General Conditions Article III - Section 3.01: Schedule 2- Project Execution Section I A: Institutional Arrangements B: Subsidiary Agreement C: Credit Enhancement Facility D: SME Fund E: Safeguards Section II: Project Monitoring, Reporting and Evaluation Section III: Withdrawal of Loan Proceeds OPINION - GENERAL In my opinion, the project maintained an adequate accounting system based on separate and clearly identifiable accounts which enabled the recording, monitoring and reporting of the operations and costs under the Programme in accordance with satisfactory accounting/financial/management practices and standards as required by the terms of the Loan Agreement Article V, Section 5.09 (A) of the Loan Agreement. AUDIT OF THE SPECIAL BANK ACCOUNT I have examined the appended Designed Account Reconciliation Statement, reflecting the movement in the Designated Bank Account for the fifteen-month period ended March 31, 2019. The Designated Bank Account No. 810614 is maintained in the United States Dollars in the name of the Ministry of Finance. My examination was made in accordance with the standards of the International Organization of Supreme Audit Institutions (INTOSAI) and accordingly included such tests of the accounting records and other procedures I considered necessary. OPINION - SPECIAL BANK AcCOUNT In my opinion, the Designated Account Reconciliation Statement reflect the total amount advanced to the Designated Account at March 31, 2019 as reconciled to the outstanding amount advanced to the account as at March 31, 2019 in conformity with IPSAS Cash basis and IBRD guidelines. Auditor General Date 3 Jamaica Access to Finance for MSMEs Project - Loan Number 8822-JM Statement of Sources and Uses of Funds Fifteen-month period ended March 31, 2019 Current Year End Cumulative Note Current Period US$ US$ RECEIPTS Actual Actual World Bank Advance from World Bank 4 262,855.88 262,855.88 Reimbursements of Expenditure 4 479,350.50 479,350.50 Front End Fee 37,500.00 37,500.00 Advance from DBJ 5 159,021.70 159,021.70 Other Income 788.18 788.18 Total Receipts (A) 939,516.26 939,516.26 EXPENDITURES Component 1: Enhancing the Credit Enhancement Fund (CEF) for guarantees to 172,967.54 172,967.54 MSME Loans Component 2: Supporting the establishment 165,873.27 165,873.27 of an SME Fund for risk capital financing to SMEs Component 3A :Enabling environment for 135,136.86 135,136.86 access to finance for MSMES, including the development of financial instruments Component 3 B. Business development 3,589.55 3,589.55 services for MSMEs to improve bankability Component 4 Project Management 236,344.21 236,344.21 Front End Fee 37,500.00 37,500.00 Other Expenses 872.24 872.24 Total Expenditures (B) 752,283.67 752,283.67 RECEIPTS LESS EXPENDITURES Net Change in Cash (A - B) 187,232.59 187,232.59 Foreign Exchange Adjustment (4,539.44) (4,539.44) 182.693.15 182.693.15 BANK BALANCES Closing Cash Balances Designated Account 693.50 693.50 Project Account 181,999.65 181,999.65 Total Closing Balance 3 IV 182,693.15 182,693.15 The financial statements on pages 3 to 10 were approved by the Bank on and signed on its behalf by: Authorized Signature Authorized Signature Authorize signatu e 4 Jamaica Access to Finance for MSMEs Project - Loan Number 8822-JM Statement of Cumulative Investments Fifteen-month period ended March 31, 2019 Current Year Current Year Cmltv Cumulative Categories US$ US$ Actual Actual Component 1: Enhancing the Credit Enhancement Fund (CEF) for guarantees to 172,967.54 172,967.54 MSME Loans Component 2: Supporting the establishment of an SME Fund for risk capital financing to 165,873.27 165,873.27 SMEs Component 3A :Enabling environment for access to finance for MSMES, including the development of financial'instruments 135,136.86 135,136.86 Component 3 B. Business development services for MSMEs to improve bankability 3,589.55 3,589.55 Component 4: Project Management 236,344.21 236,344.21 Front End Fee 37,500.00 37,500.00 Other Expenses 872.24 872.24 Total 752,283.67 752,283.67 5 Jamaica Access to Finance for MSMEs Project - Loan Number 8822-JM Designated Account Reconciliation Fifteen-month period ended March 31, 2019 LOAN/CREDIT/ PPF/ COFINANCIER NUMBER P152307 US$ 1 TOTAL ADVANCED BY WORLD BANK 262,855.88 2A LESS: ELIGIBLE EXPENDITURE FOR THE CURRENT YEAR ENDED March 31, 2019 DOCUMENTED BY WORLD BANK 2B LESS: CUMULATIVE ELIGIBLE EXPENDITURE FOR THE PRIOR PERIODS ENDED March 31, 2019 DOCUMENTED BY WORLD BANK PRESENT OUTSTANDING AMOUNT ADVANCED TO THE DESIGNATED ACCOUNT (1 - 2) 262,855.88 4A BALANCE OF USD DESIGNATED ACCOUNT PER BANK RECONCILIATION STATEMENT AS AT PERIOD END March 31, 2019 693.50 4B BALANCE OF PROJECT ACCOUNT PER BANK RECONCILIATION STATEMENT AS AT PERIOD END March 31, 2019 181,999.65 5 PLUS: ELIGIBLE EXPENDITURE FOR THE CURRENT YEAR DOCUMENTED AFTER THE PERIOD END March 31, 2019 (WA #0005) 235,433.17 6 PLUS: TOTAL AMOUNT WITHDRAWN AND NOT YET CLAIMED REASON: 7 PLUS: AMOUNTS CLAIMED IN PREVIOUS APPLICATIONS NOT YET CREDITED AT DATE OF BANK STATEMENTS APPLICATION NO. WA # WA # SUBTOTAL OF PREVIOUS APPLICATIONS NOT YET CREDITED 8 LESS: INTEREST EARNED (788.18) 9 TOTAL ADVANCE ACCOUNTED FOR (NO. 4 THROUGH NO. 8) 417,338.14 10 DIFFERENCE (3 - 9) (154,482.26) 11 EXPLANATION OF ANY DIFFERENCE SHOWN IN LINE 10 Foreign Exchange losses for the period 4,539.44 Balance to be reimbursed to the Development Bank of Jamaica (159,021.70) (154,482.26) 6 Jamaica Access to Finance for MSMEs Project - Loan Number 8822-JM Notes to the Financial Statements Fifteen-month period ended March 31, 2019 1. The Project The Jamaica Access to Finance for MSMEs Project ("The Project") is a project being undertaken by the Government of Jamaica to improve access to finance for Micro, Small and Medium Enterprises. The Project is financed by the International Bank for Reconstruction and Development (IBRD) through a US$15,000,000 loan. The duration of the Project is five years commencing on January 1, 2018 and ending on January 30, 2023. The Project is mainly facilitated by the provision of partial collateral guarantees to Approved Financial Institutions (AFI) for loans given to Small and Medium-sized Enterprise (SME) sub-borrowers, as well as the investment in SMEs by way of an SME Fund. The Project is executed by the Development Bank of Jamaica (DBJ), a wholly owned Government Institution. A Steering Committee, headed by the Managing Director of the Development Bank of Jamaica has been organized to provide oversight during implementation. The Development Bank of Jamaica, through its Project Implementation Unit is responsible for the day-to-day activities of the Project. 2. Components of the Jamaica Access to Finance Project. The project consists of four components, each of which will be completed under the following implementation arrangements. a) Component 1 - This component will enhance the Credit Enhancement Facility (CEF) for guarantees to MSME loans. This component aims at improving the operational features of the CEF. It will finance: (a) capitalization of the CEF; (b) development of a business plan, a financial model, policies and procedures for the operations of the CEF, and training; (c) strengthening of the DBJ's capacity to assess and manage risk of approved financial institutions (AFIs); and (d) marketing and awareness raising to AFIs and MSMEs. 7 Jamaica Access to Finance for MSMEs Project - Loan Number 8822-JM Notes to the Financial Statements Fifteen-month period ended March 31, 2019 2. Components of the Jamaica Access to Finance Project (cont'd). b) Component 2- The second component will support the establishment of an SME fund for risk capital financing to SMEs. The component will contribute capital to a proposed US$15 million public-private SME fund of 10 years, extendable to 12 or 15 years. The aim is to provide an average of US$750,000 in risk capital to established SMEs that have high growth potential and operations in Jamaica but have not been deemed investment worthy by private equity firms. The component will also finance: (a) management fees for GOJ's share in the SME fund and potential startup costs of the fund; (b) feasibility assessments for the fund; (c) legal, regulatory and taxation reviews to assess gaps in Jamaica's framework for Private Equity Venture Capital (PEVC) funds; proposed reforms to ensure an enabling environment for such funds; and (d) technical assistance to the DBJ, the SME fund management firm, and SMEs for the creation and operation of the programme, but mainly to facilitate pre and post technical assistance to SMEs to alleviate targeted constraints. c) Component 3 - This component focuses on improving the enabling environment for access to finance and business development services for MSMEs, which includes the development of financial instruments, such as factoring, and business development services (BDS) for MSMEs to improve their bankability. This part is subdivided into two components, 3A and 3B. Component 3A will be primarily focused on developing financial instruments. This includes a market feasibility study for factoring, which is ongoing. The other subcomponent will provide business development services for MSMEs to improve their bankability. d) Component 4 - This component facilitates the support of a Project Implementation Unit (PIU), which is responsible for the coordination, implementation, and supervision of the Project. The Project will finance the recruitment and training of PIU members, the purchase of equipment and furniture, and monitoring and evaluation (M&E) activities. 8 Jamaica Access to Finance for MSMEs Project - Loan Number 8822-JM Notes to the Financial Statements Fifteen-month period ended March 31, 2019 3. Statement of Compliance, Basis of Preparation and Significant Accounting Policies a) Statement of compliance and basis of preparation: The statements are prepared in accordance with International Public Sector Accounting Standards (IPSAS) Cash Basis. Under this basis income is recognized when funds are received rather than when requested and expenses are recognized when payments are made rather than when obligations are incurred. The Project's financial statements have been prepared using the historical cost basis. b) Significant accounting policies I. Foreign currency translation Expenditure in Jamaican dollars paid from the United States dollars Project account (designated account) held with Bank of Jamaica ("the bank"), were converted at the rate of exchange applied by the bank at the date withdrawal request were received. During the period, January 1, 2018 to March 31, 2019 the rates of exchange applied by the bank ranged from J$124.7570 to J$137.0137 to US$1. The balance on the Project's designated account was stated in United States dollars, therefore there was no need for conversion. The balances on the operating account and the SME account were converted using the closing rate of exchange which was applicable as at March 31, 2019, being J$126.4666 to US$1. 9 Jamaica Access to Finance for MSMEs Project - Loan Number 8822-JM Notes to the Financial Statements Fifteen-month period ended March 31, 2019 3. Statement of Compliance, Basis of Preparation and Significant Accounting Policies (cont'd) b) Significant accounting policies (cont'd) II. Property, plant and equipment Equipment and other fixed assets acquired with the Project resources are recorded at their acquisition cost at the date of purchase. Depreciation is not charged on these assets and as such, no depreciation charge is reflected on these financial statements. There was no purchase of property, plant and equipment during the period under review. III. Revenue recognition Reimbursements and advances are recorded on the cash basis. No interest income is recognised when received, Bank of Jamaica transfers interest earned out of the Project's special account to the Consolidation Fund at the ending of each month. IV. Available cash balances The cumulative available cash balance in the Project bank accounts at March 31, 2019 were: March 31, 2019 US$ Available cash balance 182,693.15 182,693.15 10 Jamaica Access to Finance for MSMEs Project - Loan Number 8822-JM Notes to the Financial Statements Fifteen-month period ended March 31, 2019 4. Disbursement Requests from World Bank The following disbursement requests were made during the period: Amount recorded in the Disbursement # Request Amount amount Project's financial value date requested IBRD statements January 1, 2018 to March 31, 2019 US$ US$ US$ 2018-2019 ADVANCE-01 31/01/2019 262,855.88 262,855.88 262,855.88 RETRO-REIMB-01 01/02/2019 317,350.50 317,350.50 317,350.50 REIMB-EXP-02 27/02/2019 162,000.00 162,000.00 162,000.00 Cumulative balance 1 742,206.38 742,206.38 742,206.38 5. Development Bank of Jamaica (DBJ) Advance 31 March 2019 US$ Total advances made by DBJ during the period 714,069.41 Less: amounts reimbursed during the period (555,047.71) Balance on DBJ advance account 159,021.70