MUNICIPAL DEVELOPMENT FUND OF GEORGIA LOAN NO.8380 GE GRANT NO.TF018090 (SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT) Special Purpose Project Financial Statements and Independent Auditor's Report For the Year Ended 31 December 2019 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCT1JRE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS 1 INDEPENDENT AUDITOR'S REPORT 2-3 SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2019: Summary of sources and uses of funds 4-5 Statement of financial position 6 Summary of expenditure by aclivity 7 Statement of expenditure ("SOE") 8 Statements of designated account 9-10 Notes to the special purpose project financial staternents 11-16 1. B ackg ro u nd~. . ................................ro.. .......... ............ 1 2 . A ccounting policies....... ............................ .. - ~...... 1 3. D esignated account ... ..... ............................................. . . . . . ............ 12 4 . B a sis o f fu n d ingndi. n..................................... ................................................ ... 1 2 5. M eth od s of w ithd raw a l ................................................................ ................ . ....... .13 6. Statem ent of expenditure ..........mfdr.............e-d...... ....... ...-.......................13..... 13 7. Prepaym entsae.. ................. .-3-....... ................... ......,..,. ..3~13 8. C ash.......1...............-- .... .... ... .......- .14 9. Project expenditure by fund - - -- - . .......................................-....... .... . 14 10. Reconciliation of designated account .............................. ......... ................. .. 5 11. Com m itm ents and contingencies....... ................................ ....- .... -................ . 12. O perating enviro 1nent ............... ........ ..... .. ... .. ~.~~ ~ ~~ ~ ~~ ~~15 13. Prolongation of the project's closing date ............ ............... .... -.. - - 16 14 . S ubsequent events. -.. ... - - - .- ............................................................................. 16 MUNICIPAL DEVELOPMENT FUND OF GEORGIA STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2019 Management of the Second Regional Development and Municipal Infrastructure Development Project (the "Project"), financed under the Loan Agreement No. 8380-GE dated 18 August 2014 and Grant Agreement No. TF018090 dated 1 May 2015, implemented by the Municipal Development Fund of Georgia ("MDF") is responsible for the preparation of the special purpose project financial statements that present the Project's statement of financial position as at 31 December 2019, the summary of sources and uses of funds, summary of expenditure by activity, statement of expenditure ("SOE") and statements of designated account, in compliance with the basis of accounting described in Note 2 the accompanying special purpose project financial statements. In preparing the special purpose project financial statements, management is responsible for: Properly selecting and applying accounting policies; o Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; Providing additional disclosures that enable users to understand the impact of particular transactions, other events and conditions on the Project, financial position and its sources and uses of funds and movements in designated accounts; and Management is also responsible for: o Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Project; * Maintaining adequate accounting records that are sufficient to show and explain the Project's transactions and disclose with reasonable accuracy at any time the financial position of the Project; * Maintaining statutory accounting records in compliance with Georgian legislation; * Taking such steps that are reasonably available to them to safeguard the assets of the Project, and * Preventing and detecting fraud and other irregularities. The special purpose project financial statements for the year ended 31 December 2019 were authorised for issue on 29 June 2020 by the Management. On behalf of Management: ink - Levat harva#2e Executive Director Deputy Director -- Chief Financial Officer 29 JLne 2020 29 June 2020 Deloitte & Touche LLi 12 Merab Aleksidze Street, King David BSinesS Center, Tbilisi, 0171, Georgia Tel +995 (32) 224 45 66 Fax: +995 (32) 224 45 69 INDEPENDEN1 AUDITOR'S REPORT To the management of the Municipal Development Fund of Georgia: Opinion We have audited the accompanying special purpose project financial statements of Second Regional and Municipal Infrastructure Development Project (the "Project") financed under the Loan Agreement No. 8380-GE dated 18 August 2014 and Grant Agreement No. TF018090 dated I May 2015 (the "Agreements"), implemented by the Municipal Development Fund of Georgia, which comprise the Project's summary of sources and uses of funds for the year ended 31 December 2019, statement of financial position as at 31 December 2019, summary of expenditure by activity, statement of expenditure ("SOE") and statements of designated account for the year ended 31 December 2019 and a summary of significant accounting policies and other explanatory notes (collectively referred to as the "special purpose project financial statements"). In our opinion, the accompanying special purpose project financial statements for the year ended 31 December 2019 are prepared, in all material respects, in accordance with Loan Agreement No. 8380- GE dated 18 August 2014 and Grant Agreement No. TFO18O90 dated 1 May 2015, as further detailed in Note 2. Basis for Opinion We conducted our audit in accordance with International Standards of Auditing ("ISAs"). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Fund in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (the "IESBA Code") together with the ethical requirements that are relevant to our audit of the financial statements in Georgia, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion, Other matter Data included on pages 4 to 16 of the accompanying special purpose project financial statements that are marked as "Unaudited" have not been audited. Emphasis of Matter Basis of Accounting and Restriction on Distribution and Use We draw attention to Note 2 to the special purpose project financial statements, which describes the basis of accounting, The special purpose project financial statements are prepared to assist the Project's management to comply with the financial reporting provisions of the Agreements. As a result, This report is ntended sole,y .or use ry [ne Proects manaqemon in report,ng the n-o:mation to :ej Government of Georgia and International Bank for Reconstruction and Development (IBRD). This report is not intended for the benefit of any other third parties and we accept no responsibility or liability to any party other than the Project's management in respect of the report. Should any third party take decisions based on the contents of the report, the responsibility for such decisions shall remain with those third parties, Our opinion is not modified in respect of this matter. Deoi rifers toe or riore of Delo;tte Touche T hrrnet Liie'. a UK pii vAt Compaiy hn'td by gu ia-n _"TT ), its ret,,oik of membe firms, d heir rolated oe ttes DT I nd -air of sts meier fies; are egially separte and endeendeut entities. DL ( o err-e to a' "Deon,, Gloail" oot noe s rovide sorv ces to clients Please see [or a more diiled d LsfrIp'en oD DTTL and it, meibr fire;. 2020 Dliatte Touche lC. A )i asghis oseoeed 2 Responsibility of Management and Those Charged with Governance for the Special Purpose Project Financial Statements Management is responsible for the preparation of these special purpose project financial statements in accordance with the basis of accounting described in Note 2 and in conformity with the financial reporting provisions of the Agreement and for such internal control as management determines is necessary to enable the preparation of special purpose project financial statements that are free from material misstatement, whether due to fraud or error. Those charged with governance are responsible for overseeing the Project's financial reporting process. Auditor's Responsibilities for the Audit of the Special Purpose Project Financial Statements Our objectives are to obtain reasonable assurance about whether the special purpose project 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 our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these special purpose project financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional skepticism throughout the audit. We also: Identify and access the risks of material misstatement of the special purposes project financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our 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. Obtain an understanding of internal control relevant to the audit 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 Fund's internal control * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Siuart Leichron On behalf of Deloi-t nd Toucie LLC 29 June 2020 Tbilisi, Georgia 3 � о оое3сэ � � о �сас� ® V ц� о °ооог�з ®; с�а оа� � cr -,� � с� с� с� еп n �; с� о с� и �� са оисцш м сзиr� # в. � о tз r� rn r� �"' �i м п г`°i �. С� р с7 зл пi rv аа � f� nё�аз �' ,.. �� м н а7 сГ д? ц1 � tl! � ,а v ° rv °л � м r� и �,у +t ry +, д� д�ё '� п о н � Гrv � � � °� +а _ rv .-ч м � Es'ч' ь'� 7 �+ .. �ц 6J �4. I�, ro .� � rn � с� � м с? гv г. � � � гл м �д � � еУ n о .ч й��� b Q� б� с0 � ы н � � rч и� м., гТ и5 б цТ�. а��у п д� э� о �, I �, о исао � �" � � rn м � ьИ• с�' а г+ й г. са в, � �°^ � н с ci м й - С,} # � п1 �. � м ч-� � # 3 �.�... щ�л Pq R7 CJ гС.. � с � � � � �, ��?.� г3 е� с� � б � ��r � °о°о ® � у� . . о о о � � � � �� � � °� � � � м � и"r м пj �� � � � LL@ �ia � 691 � � � . и гд [п n eG и tv t+� л� И и7 о gц � �% и1 гv •-1 гц N н� .-1 н ер и3 N н� �� �. �р иw -lлгvигЛ У дц п, rvrЧCS �,.I ,-Э й! ?� а. сУ ffч о7 мг и w �р Сэ гv N ьп �.; � � �� т or�iu`�'iо�з� ^.r °� � v�.п� г-' ео h: � �� пt v ш й+л `� � м и ^ ц � � е� � '�' м � � 3 I � � ? �} � . а `� 'а Ge ���. гк7 'еУ' t? � С,9 ..���', iв И iл н N ил �..г] +i н �6 о� � а,«а' Ro �� flp � �rоцм �и � сд г-�^н � к�' �. (� '� D р7 м tд � ® О� 1� t�F И N['Л С"?� �g цJ tD г"�7 ц��.. N � е� [Л ц7 ir7 W ni �+V н й N бi W� � W N N tn �. � гv �1 м С7 'С � С7 С7 � � �� и М о tP �-+ "� � О1 t'J т Сд И �� о ГА м � w � � 67 � rк '-' � � сГ •� � м � ut a v � � � � � � Р9 wa � . � � , �� wг.. � � ,.,. _ ы _" � - � � � ,: � �г й й `� ` и сл � � 4t. п � � �f9 � < � . � --� � а и - с� �'�i�аw� �� Uгq Ез'^ � � � '"' 4 � с °� � �j q� � � ы С �61 Агч С '� И -С � � 4Л /уΡ� 3 � fU 1SF И L�1 ' " '� �:я � � ~ � � t�1nJ� � w О � � {1Э +-ы г,Л � �° � �. �.. �.! С� � � И и �� С [�71 �� i%i � i�. а� � Е ЬL �� i� � и г`i W 'CS � сл еа � и � � Vw} эr D ti � � ОС� i�yy� � �� � т7. '� �aN � д ма �€и � 4: � � � U � � � � #7 С с С � N � � `'7ч � й � � й ш ? � � г3 .� х 4Э � � � �С � � � °1.� и � �и r�л� �� го' ы � � � � о � ш 3�и � � ,,� � � Lry н �� ш .а CJ с?¢ � м� ��'� "J � и^�.. � .,л�ш „.! � � ia � ��� � � fl. и� �� р й_ cs v� �э с; v � ил �е л и ш а � ��J�� ��� � +�'а�шт � С} �3оов��°� д х °-1о�`ч°vfl ty `� � i1R �$� V1 I� С7 U в. г.� в. h- I9! vr U��� а С] Fw Э�л � r[ t1 .® Q с,7 ш 1- с� �= L С 97 И Ш С3 N �' а а а � й � пz с Е � с � �_ � � с_ в ar и � v �_ �° а� � � �В9 `� � `v Q д . � i�C � • �' � � а �� v �- в �i ев � � � ,-� а с й � Г" `° � � W �у � с � м � П. 31 '-'? 4U � 0.J '� � ' i„ � д�q � �"J �. :.,. � 'С LЛ L ° г' �.,ё а � � �7 1 G E�LF ы� t го�j и � � � � о�`-' r�,"` ° ° ц6 � �- .� � � [] ° а � � а� с� са оа Су с�_. � 7� s. и °Y � � �n©�'А М о � v � � , С1 с ° � � и'roС�•-i19�.. Р. � �° ��у 43� ^� а � ы tR 4 �5' g' � М� �,, �. p�j � J С4 С� Уу а � r, гц '� - ,�` гL7 G �3 !iS � � N @ � N � � а я, rta а и � {} .. ' С'а � Ш ✓ ai си и Ъд� у� а`�i � р r � � g й � +� м г�1 сюг�тгд р � а � ®t � �"� � � � � ``�r' � �, �� � $ �� Егч о н с� �' г. о�� т � м ��' wo�m�'�.' �'f г�тэ го а � гV �'� ai г�и � �; т �� �� N-� � ЁЕ� i� � � ы�л„ -�� � , ' v �- i, i _ "п�'- _ � � � � � SSS �'' I � � � r� � I .з �� � �� � � �,�� � � �� у�� �БЬ& � а ��,� � � а Bii �� � й Ы й аз гv ŭj q1 а г � � � � � л �, .�. �, ы�А�s� ��а г ��� � j `� ��'"CV� �� ё `у� �' �_ � �'� � � ��f+�9FR k4.,� � � С'_ °гл� � � � � � � � � � W ;� Ci �'" а� � '�n'.ш сэ �` � � � � � i с � Е � й у,�, _'г7 rv о 43 �� F°" хУ �� 67 w д� и а� ы � �.� а � ��,�� �НИ м а�.-г � '�t ,�� �ф3 � с � �C�jQ� �г�� � � ,�,гхш сй го � _1 �, � W'� � с � �gJ � рС � � � '� � ш � .с �, � � J � _о �i ^ а� ��Ii J д� V1 l� i�1 L� гi сг С� с`� � ь±� � С� � ы�д г'�ч � MUNICIPAL DEVELOPMENT FUND SECOND REGIONAL AND MUNICIPAL INFRASTRUCTL- -",-V--LOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TFO18090 STATEMENT OF FINANCIAL POSITION FOR THE YEAR EDNED 31 DECEMBER 2019 (in US Dolfqrs2 31 December 31 December Note 2019 2018 ASSETS Cash 3's 2,685,648 1,028,878 Prepayments 7 1,060,780 926,104 Receivables from municipalities 441,098 155,810 Other receivables 96,168 TOTAL ASSETS 4,233,6'34 2, 110, 792 LIABILITIES Payables (246,664) _____(±48,7 2 Total liabilities (246,664) (448,712) NET ASSETS 4,037,03D 1,662 80 Funds received, IBRD loan 8380-GE 22,897,525 17,966,576 SDC grant 4,024,118 2,811,373 Government of Georgia 6,349,529 5,532,324 MDF funds 5,546,227 3,711,687 Funds from municipalitics 5,862,516 4,361,284 PPP funds 45,915 - Other income 426,412 426,056 Total funds received 45154242 34,811,302 Expenditures: Project ex[ (,i%ditiire 40,780,202 ..... 32,840, SC',- Total Expenditures 40,780,202 .. 32LB49,_50-5 Foreign exchange loss, net i' 337,010) (299,716) TOTAL NET ASSETS 4,037,030 1,662,080 On behalf of Management: 29 Jur, 202D 21, June 2020 The notes on pages 11 to 16 form an integral part of these special purpose project financial statements, 6 MUNICIPAL DEVELOPMENT FUND SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 STATEMENT OF EXPENDITURE BY ACTIVITIES FOR THE YEAR EDNED 31 DECEMBER 2019 (in US Dollars) Actual Planned* Variance Project activities Cumulative Cumulative Cumulative Yearended as at Year ended as at Year ended as at 31.12.2019 31.12,2019 31.12.2019 31.12.2019 31.12.2019 31.12.2019 Unaudited Unaudited Unaudited Unaudited Component 1: Infrastructure investment 5,812,367 34,142,987 6,300,000 34,630,620 487,633 487,633 Component 2; Institutional development 2,118,330 6,562,215 2,500,000 6,943,885 381,670 381,670 Front end fee - 75 000 - ------- - -000 - TOTAL EXPENDITURES 71930,697 40,780,202 8,800,000 41,649,505 869,303 869,303 The budget figures are updated several times during the year. Planned figures for the year ended 31 December 2019 included in the IFR (interim financial report) represent the final figures reflected n the State Buoget for FY2019 adjusted to the accrual model, On behalf of Management: . 9 ILevAn Sharvadzte Executive Director Deputy Director - Chief Financial Officer 29 June 2020 29 June 2020 The notes on pages 11 to 16 form an integral part of these special purpose project financial statements. 7 MUNICIPAL DEVELOPMENT FUND SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 STATEMENT OF EXPENDITURE (SQE) FOR THE YEAR EDNED 31 DECEMBER 2019 (in US Dollars) Withdrawal applications for Loan: Category 2: Category 3: Consultants Goods, service, Consulting Training and Service, Incremental Training under Withdrawal Category Category operating 82 Withdrawal application la: Works ib: Works costs under No. date Total SOE and Goods and Goods Part A2 25 13.12.2019 728,334 416,547 93,170 87,153 131,464 23 23.09.2019 1,128,055 442,262 338,593 218,948 128,252 19 21.05.2019 755,020 293,377 132,696 99,853 229,094 18 03.01.2019 _1,598,028 446,991 676,971 233,916 238,150 1,601,177 1,241,430 639,870 726,960 Withdrawal applications for Grant: Withdrawal Goods, Consulting service, Withdrawal No. application date Total SOE Training under 82 25 12,11.2019 197,101 197,101 18 10.06.2019 344,417 344,417 16 18.03,2019 174,084 174,084 715,602 On behalf of Management: I getv- Levan Sharvadze Executive Director Deputy Director - Chief Financial Officer 29 jun 2020 29 June 2020 8 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 STATEMENT OF DESIGNATED ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2019 .in US Dollars) Account No. 202250160 Depository Bank State Treasury Address 16 V. Gorgasali street Tbilisi, 0114 Georgia Opening balance Note 192,124 Funds received from IBRD (Loan) 4,209,436 Present outstanding amount advanced to Designated Account ("DA") 4,401,560 DA closing balance as at 31 December 2019 8 1,615,238 Add: Armount of eligible expenditures paid 10 2,786,322 Total advance accounted for 4,401,560 On behalf of Management: jo gi geti Levin Sharvad ze Executite Director Deputy Director - Chief Financial Officer 29 June 2020 29 June 2020 The notes on pages 11 to 16 form an integral part of these special purpose project financial statements. 9 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2019 (CONTINUED) (in US Dollars) Account No. 202230160 Depository Bank State Treasury Address 16 V. Gorgasali street Tbilisi, 0114 Georgia Opening balance Note 322,556 Funds received from IBRD (Grant) 715602 Present outstanding amount advanced to DA 1,038,158 DA closing balance as at 31 December 2019 8 326,396 Add: Amount of eligible expenditures paid 10 711,762 Total advance accounted for 1,038,158 On behalf of Management: ogl e eng Levan Shbrvadze t cra iv Orector Deputy Director - Chief Financial Officer 29 June 2020 29 June 2020 The notes on pages 11 to 16 form an integral part of these special purpose project financial statements. 10 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TFO18090 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2019 (CONTINUED) (in US Dollars2 1. BACKGROUND Municipal Development Fund of Georgia (the "Fund' or "MDF") was established on 7 June 1997 by the Presidential Decree No 294 "On management of funds for the development of municipal sector in Georgia" The Fund is a legal Fund of public law, the objective of which is to support strengthening institutional and financial capacity of local government units, investing financial resources in local infrastructure and services, improving on sustainable basis the primary economic and social services for the local population and the provision of low-interest loans to legal entities and physical persons of Georgia in the framework of the Government Program. The founder and governing body of the Fund is the Government of Georgia. The Fund is cooperating with majority of large investment banks and financial institutions operating in Georgia. The International Bank for Reconstruction and Development Loan Agreement No. 8380-GE (the "Agreement") in the amount of 30 million United States Dollars ("USD") was signed between the Government of Georgia ("GoG") and International Bank for Reconstruction and Development ("IBRD") on 18 August 2014 ("inception"). Swiss Grant Agreement No. TF018090 (the "Agreement") in the amount of 5 million United States Dollars ("USD") was signed between the Government of Georgia ("GoG") and International Bank for Reconstruction and Development ("IBRO") on 1 May 2015. The main objectives of the loan are: providing finance on the credit and grant basis to selected Local self-governments ("LSG") to finance investment sub-projects related to municipal services; preparation of feasibility studies, construction supervision, monitoring and evaluation activities for investment subprojects; enhancing the institutional capacity and performance of LSGs and MDF. Apart from donor financing, part of the amount is also financed by LSG, Public Private Partnerships (PPP), GoG and MDF as well. The closing date of the loan is 30 August 2024. 2. ACCOUNTING POLICIES Basis of accounting - These special purpose project financial statements have been prepared in accordance with the provisions of the Loan Agreements No. 8380-GE dated 18 August 2014 and Swiss Grant Agreement No. TF018090 dated 1 may 2015 to the extent applicable to these special purposes financial statements and as agreed by the Fund, Government of Georgia and International Bank for Reconstruction and Development (IBRD) and Swiss Agency for Development and Cooperation (SDC). The special purpose project financial statements have been prepared on the accrual basis of accounting. Agreement, aie prepared co reporc the information cc the Govenmen: of Georga ara international Beck to- Reconstructcon and Development. As a resuLt these speciai purpose project financial statements may not be suitable for another purpose. Sources of funds - Project financing is recognised as sources of funds in the period when the cash inflow can be reasonably estimated and they become available and measurable. The accumulated project financing is disclosed under "Funds" in the statement of financial position. In addition current year funds received is disclosed in the Statement of Sources and Uses of Funds, showing under sources funds and expenditures respectively. Expenditure - is recognised on an accruals basis as a use of project funds when liabilities are incurred. The accumulated project expenditures is disclosed under "Expenditure" in the statement of financial position. 11 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENt 'PROJECT LOAN NO.8380-GE GRANT NO.TF018090 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2019 (CONTINUED) (in US Dollars) Functional currency - The functional currency of the project and its presentational currency is United States Dollars ("US Dollar" or "USD"). Transactions in other currencies - Transactions in currencies other than the reporting currency are converted to US Dollars at the exchange rate prevailing at the date of the transaction. Monetary items are translated into US Dollars at the National Bank of Georgia (NBG) official exchange rate at the reporting date. Prepayments - Prepayments represent the amounts paid to the contractors for work. Cash - Cash comprises of balances with State Treasury. 3. DESIGNATED ACCOUNT The designated account is a special disbursement account of the Project maintained in US Dollars at the State Treasury to ensure the payment of eligible expenditures, within defined limits, which do not require individual authorisation from IBRD in accordance with the Agreement. 4. BASIS OF FUNDING According to the terms of the Agreement, expenditure is co-financed by proceeds received from IBRD, Swiss Grant, the Government of Georgia ("GoG"), MDF and Municipalities. The financing is provided from the following sources: * Goods and Works under part A.1 (a) - IBRD, MDF and Municipalities: 40%, 40% and 20%, respectively; * Goods and Works under part A.1 (b) - IBRD and Municipalities: 85% and 15%, respectively; . Consultants' services, training under Part A.2 of the project and incremental operating costs - IBRD and GoG: 80% and 20%, respectively; and * Goods, consultants' services and training under Part B of the Project - IBRD, Swiss Grant and GoG: 22.8%/o, 57.2% and 20%, respectively. Swiss Municipali IBRD Grant GoG MDF ties Total Goods and works under part A.1 (a) 12,925,000 12,925,000 6,465,000 32,315,000 Goods and works under part A.1 (b) 13,000,000 - 2,295,000 15,295,000 Consultants' services, training under Part A.2 of the Project Goods, :onsul1ants services and trainiro under Dart B of the Project 2,000,000 5,000,00 1.750,000 - - ,750,000 Front-end fee 75,000 - - 75000 Total: _30,000,000Q 5,000,000 2,250,000 12,925,000 8,760,000 58,935,000 12 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2019 (CONTINUED) (in US Dlas 5. METHODS OF WITHDRAWAL The methods of withdrawal used from the inception of the loan to 31 December 2019 were as follows: (a) Designated Account Municipal Development Fund withdraws the eligible amounts from the designated account and prepares and sends replenishment requests to the World Bank with authorised signatures. The replenishment requests and respective documentation are reviewed by the International Bank for Reconstruction and Development and an approved amount is transferred to the designated account. (b) Direct Payment Available amounts are drawn from time to time within limits determined under the loan agreement for direct payments of eligible expenditures for sub-projects. Direct payments are made by the International Bank for Reconstruction and Development directly to third parties. MDF forms withdrawal applications for request of direct payments and sends it to the World Bank, for settlement. (c) GoG Current Account The Project maintains a separate account where funds from the Government of Georgia are accumulated. The funds are further disbursed to sub-contractors based on the share of expenditures to be incurred. 6. STATEMENT OF EXPENDITURE Withdrawals are to be made on the basis of SOEs for expenses on contracts within the following contractual limits: (i) All expenditures for works valued at less than USD 4,000,000; (ii) Consultant services contracts (firms) valued at less than USD 200,000; (iii) Consultant services contracts (individuals) valued at less than USD 50,000; and (iv) All expenditures for goods and non-consulting services valued at less than USD 300,000; 7. PREPAYMENTS 31 December 31 December 2019 2018 Total L.,60730 926,t04 Payments of advances to contractors are made at the beginning of the contract in amount of 10%-30% of total contract amount. Retention of advance is done periodically upon submission of works completed certificates by contractors. 13 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2019 (CONTINUED) (n US Dollars) 8. CASH 31 December 31 December 2019 2018 Balance on designated account (Loan) 1,615,238 192,124 Balance on designated account (Grant) 326,396 322,556 Local account 744,014 514,198 Total: 2,685,648 1,028,878 9. PROJECT EXPENDITURE BY FUND Actual Year to Cumulative to Project activities date date Works and Goods (part A.1(a) & part Al (b)) 2,432,109 16,629,081 Consulting services, training and incremental operating costs under Part A.2 382,976 2,630,144 Goods, consultants, training under Part B 504,643 1,597,754 Front- end fee - 75,000 IBRD TOTAL 3,319,728 20,931,979 Works and Goods (part A.1(a) & part Al (b)) - - Consulting services, training and incremental operating costs under Part A.2 18,209 42,731 Goods, consultants and training under Part B 1 191,006 3,658,864 GRANT TOTAL 1,209,215 3,701,595 Works and Goods (part A-1(a) & part Al (b)) 639,595 Consulting services, training and incremental operating costs under Part A-2 407,237 968,096 Goods, consultants and training under Part B 422,681 1,291,342 GoG TOTAL 829,918 2,899,033 Works and Goods (part A.1(a) & part Al (b)) 1,617,936 8,273,434 Consulting services, training and incremental operating costs .nder Part A.2 <522,836 ,273,434 Works and Goods (part A.1(a) & part Al (b)) 952,646 4,958,652 Consulting services, training and incremental operating costs under Part A.2 1,253 1,254 Goods, consultants and training under Part B - 14,255 MUNICIPALITIES TOTAL 953,899 4,974,161 TOTAL PROJECT EXPENDITURES 7,930,696 40,780,202 The Project consists of the following main components: 14 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2019 (CONTINUED) (in US Dollars) Component 1 - Infrastructure investment Provision of financial resources to local self-governments to carry out investment sub- projects for urban regeneration: an integrated approach for renewal of Telavi Kvareli and the heritage village of Dartlo; * Tourism circuit development: integrated approach to culture heritage site upgrading and improved management in the most attractive 11 cultural heritage sites located along the main tourism circuit/route in Kakheti; and a Provision of financial resources to local self-governments to carry out investment subprojects for public infrastructure to attract private sector investments in tourism and agro-processing. Component 2 - Institutional development Enhancing the institutional capacity and performance of the Georgia National Tourism Administration ("GNTA"), the Agency for Culture Heritage Preservation of Georgia (ACHP), the Project Implementing Entity (MDF), and other local and regional entities to carry out the following activities: o Destination management and promotion, including local outreach campaign; * Geo-tourism routes and tourism portal; * Skilled workforce development and capacity building; * Construction supervision and sustainable site management of cultural heritage; and Performance monitoring and evaluation activities. 10. RECONCILIATION OF DESIGNATED ACCOUNT Other (GoG, MDP, IBRD IBRD Municipalities, (Loan) (Grant) _PPP) Total Expenditures incurred during the year 3,319,730 1,209,215 3,401,752 7,930,697 Direct payment (719,511) (497,143) - (1,216,654) Change in prepayments (133,434) (759) 268,869 134,676 Change in payables 163,838 2,851 35,359 202,048 Change in receivables - - 381,456 381,456 Foreign exchange 155,699 (2,402) (115,673) 37,294 Management is not aware of any commitments and contingencies which would have a matenal impact on the financial position of the Project and the Special Account Statement as at 31 December 2019 and on the funds received and disbursed during the year then ended. 12. OPERATING ENVIRONMENT Emerging markets such as Georgia are subject to different risks than more developed markets, including economic, political and social, and legal and legislative risks. Laws and regulations affecting businesses in Georgia continue to change rapidly and tax and regulatory frameworks are subject to varying interpretations. The future economic direction of Georgia is heavily influenced 15 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2019 (CONTINUED) (in US Dollars) by the fiscal and monetary policies adopted by the government, together with developments in the legal, regulatory, and political environment. For the last two years Georgia has experienced a number of legislative changes, which have been largely related to the European Union Association Agreement. Whilst the legislative changes implemented during 2016 and 2017 paved the way, more can be expected as Georgia's action plan for achieving accession to the European Union continues to develop. In addition to that, starting from early 2020 a new coronavirus disease (COVID-19) has begun rapidly spreading all over the world resulting in announcement of the pandemic status by the World Health Organization in March 2020. Responses put in place by many countries to contain the spread of COVID-19 are resulting in significant operational disruption for many companies and have significant impact on global financial markets. As the situation is rapidly evolving it may have a significant effect on business of many companies across a wide range of sectors, including, but not limited to such impacts as disruption of business operations as a result of interruption of production or closure of facilities, supply chain disruptions, quarantines of personnel, reduced demand and difficulties in raising financing. In addition, the Fund may face the increasingly broad effects of COVID-19 as a result of its negative impact on the global economy arid major financial markets. The significance of the effect of COVID-19 on the Fund's operaitons largely depends on the duration and the incidence of the pandemic effects on the world and Georgian economy. The economic shock caused by the coronavirus and the expectations of the future development of pandemic and its impact on the Georgian economy have been reflecting on increased volatility of the foreign exchange market and weakening of Georgian Lan against other currencies Management is unable to predict all developments which could have an impact on the Georgian economy and consequently what effect, if any, they could have on the future financial position of the Project. Management believes it is taking all the necessary measures to support the sustainability and development of the Project's operations. 13. PROLONGATION OF THE PROJECT'S CLOSING DATE Due to closing date of the grant on 30 April 2021, the Ministry of Finance of Georgia requested from International Bank for Reconstruction and Development an extension of the closing date of the Second Regional and Municipal Infrastructure Development Project until 30 August 2024 for the completion of ongoing works under this Project. At the date of signing of these special purpose project financial statements, the approval from World Bank has been made, 14. SUBSEQUENT EVENTS On 21 May 2020 additional loan agreement No.9099-GE has been signed between Government of ron.-~ u- I,--i. ,O000000 w.tn n orcon Region n u iL pal intrasciucture Devel opmen rim eI. Tn dosing cate for the add ioral financng Lontract is 30 August 2024. 16