Project "Ust-Kamenogorsk Environmental Remediation Project", financed under Agreement Number 4848-KZ between the International Bank of Reconstruction and Development and the government of the Republic of Kazakhstan Financial Statement for the year ended December 31, 2016 And Independent Auditors' Report Table of content Independent audit report Financial statement Statement of receipts and disbursements of fund. ............................. 1-2 Notes to financial statements ........................................... 3-7 Ten.: +7 727 331 31 34 TOO "BDO Kazakhstan" IOaKc: +7 727 331 31 35 yn. ra6AyllMHa, JB D O info@bdokz.com AnmaTbI, Ka3aXCTaH www.bdokz.com Al 5H4E3 Tel: +7 727 331 31 34 BDO Kazakhstan LLP Fax: +7 727 331 31 35 6 Gabdullin Street info@bdokz.com Almaty, Kazakhstan www.bdokz.com Ai5H4E3 INDEPENDENT AUDITORS' REPORT To the Management of the Project "Ust-Kamenogorsk Environmental Remediation Project" ("Project"), financed under Agreement Number 4848-KZ between the Government of the Republic of Kazakhstan and the International Bank of Reconstruction and Development. Opinion We have audited the accompanying financial statements of Project "Ust-Kamenogorsk Environmental Remediation Project" ("Project"), financed under Agreement Number ,2t.aZ between the Government of the Republic of Kazakhstan and the International BZTh of Reconstruction and Development which consist of the statemdnt of receipts and ,isbursements for the year ended 31 December 2016, as well as a summ6ry of significant acciur.t;ng policies and other explanatory notes. In cur opinion, the accompanying financial statements fairly present, in all material respects, the cash receipts and disbursements for the year ended 31 December 2016 and cash position as at 31 December 2016 in accordance with the International Public Sector Accounting Standard (IPSAS) "Financial Reporting under the Cash Basis of Accounting" published by the International Federation of Accountants (IFAC) and in accordance with the requirements of the International Bank of Reconstruction and Development. Basis for Opinion We have performed our audit in accordance with the International Standards on Auditing. Our responsibilities under those standards are described in the section Auditor's Responsibility for the Audit of the Financial Statements herein. We are independent in relation to the Company, as required by the Code of Ethics for Professional Accountants of the International Ethics Standards Boards for Accountants (Code of IESBA) and the ethical requirements applicable to our audit of the financial statements in Kazakhstan, and we performed other ethical responsibilities of ours in compliance with those requirements and the Code of Ethics for Professional Accountants. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our cpinion. r.er-2nsibility of the Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with the IPSAS "Financial Reporting under the Cash Basis of Accounting" published by the international Federation of Accountants (IFAC) and in accordance with the requirements of the International Bank of Reconstruction and Development, and for such internal control as management determines is necessary to enable preparation of the financial statements that are free from material misstatement, whether due to fraud or error. Toaapwugecmoo c orpaHMqeHHoA OTBeTHeHHOCTblO "BDO Kazakhstan", saperHcTPpaBHHOe B CDOTBeTcTBmi C 3aKoHOpaTeAbCTBoM Pecny6nmm KasaXCTaH, IlAseTCA y'aICThHKOM Me)KyHapDAHOD 06b1AMHeHHA BDO International Limited, 6pTaHcHoro oftlsecTea C oTBeTcToeHHOCT6WO, orpaHeHHOA rapaHTHeH ero yqaCYHHKOB, H sae-Tcs 4acTio MeHKAyHapoAHoA ceTM He3aawcHMbix KominaHHA BDO. BDO Kazakhstan, a limited liability partnership, registered under the laws of the Republic of Kazakhstan, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the internationa BDO network of independent member firms. INDEPENDENT AUDITORS' REPORT (continued) In preparing the financial statements, management is responsible for assessing the Company'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 management either intends to liquidate the Company or to cease operations, or has no realistic alternatives but to do so. Those charged with governance are responsible for overseeing the Company's financial reporting process. Auditor's Responsibility for the Audit of the Financial Statements Our objective is to obtain reasonable assurance whether the financial statements are free of material misstatement due to fraud or error, and to express the audit opinion. Reasonable assurance means a high degree of certainty, but does not guarantee that the audit performed in accordance with the International Standards on Auditing always identifies significant misstatements, if any. Misstatement can be caused by fraud or errors, and are considered material if you can reasonably assume that they, individually or cumulatively, can impact users' economic decisions made on the basis of the financial statements. As part of the audit, in accordance with the International Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: * Identify and assess the risks of material misstatement in the financial statements, whether due to frAud or errors; design and perform audit procedures responsive to those risks; and obtain audit evidence that is sufficient and approprivte to provide a basis for our opinion. The risk of not detecting risk of material misstatement resulting from fraud is higher than the detection risk of material misstatement due to errors, since fraud can involve collusion, forgery, intentional omissions, misrepresentations or itiformation or override of internal controls; * Obtain an understanding of the internal controls 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 Cormpany's internal control. * Evaluate the appropriateness of accounting policies used, and the reasonableness of accounting estimates, and appropriateness of disclosures prepared by management; * Evaluate the overall presentation of the financial statements, its structure and content, including disclosures. We also evaluate whether the financial statements present the underlying transactions and events so as to ensure their fair presentation. 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. We also provide those charged with governance with a statement that we have complied with relevant ethical ruquirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements for the current period and, therefore, the key audit matters. We describe these matters in our INDEPENDENT AUDITORS' REPORT (continued) auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit, resulting in the independent auditor's report, is Igoshina Natalia. LLP -BDO Kazakhstan State audit license for audit activities on the territory of the republic of Kazakhstan: N91 50003448 issued by the Ministry of Finance of the Republic of Kazakhstan on 19 of February 2015 Director T.A. Omarov <29>> May 2017 Audito ohi Auditor Qualification fia ber MO-0000040, issued by I ation Commission for certification of auditors of the Republic of Kazakhstan 08.08.2011 Republic of Kazakhstan, Almaty, Gabdutlina, 6 Project "Ust-Kamenogorsk Environmental Remediation Project" financed under Agreement No. 4848-KZ between the Government of the Republic of Kazakhstan and the international Bank of Reconstruction and Development Financial statement STATEMENT OF RECEIPTS AND DISBURSMENTS OF FUNDS For the year ended 31 December 2016 2016 2015 US Dollars Notes Proceeds from Proceeds from the IBRD loan the Government Total IBRD loan Government of the Total of the RK RK The cash balances as of Vt of January 1,364 - 1,364 548,152 548,152 RECEIPTS Receipts to special - - - 356,554 - 356,554 account Direct payments 97,858 394,989 492,847 - 954,721 954,721 Other Receipts Total Receipts Under the Project 5 97,858 394,989 492,847 356,554 954,721 1,311,275 Expenses Part A: Localization of the first priority pollution sources of ground water Construction works 97,858 43,583 141,441 902,463 462,747 1,365,210 Consulting Services - 170,229 170,229 - 176,063 176,063 97,858 213,812 311,670 902,463 638,810 1,541,273 Part B: Remediation of Current Contaminated Groundwater Site Consulting Services 123,300 123,300 - 182,035 182,035 - 123,300 123,300 - 182,035 182,035 Part C: Project management and monitoring Consulting Services - 57,877 57,877 - 133,876 133,876 - 57,877 57,877 - 133,876 133,876 Total Project expenses 97,858 394,989 492,847 902,463 954,721 1,857,184 Notes on pages from 3 to 7 form an integral part of the financial statements. E . O O r T W r', No ý I 000-< Ln Q) 0 -b LL-- eoe 4-1 CO rn 0 0'e ) E 41 4->- Ný '0 0< r CO o0 N u a- -: - - :00 0)0 00 oo 0)! 0)4- a) a)0 L- 0). W m q) E 000 EC 4e Q> o fa = -e- I-:: - e - m 4J0 - -> 0 z~ v) E LLA to oý o V>- je w .c :::q-*3 o 00 0 4- nEK I. E .. .- e - -..c - 4 0 00 - 0 I ueS3 ) z 1 - 0-o). oL.) o r .. .-- r - 4 --J o 0 - o0 W n 4-4- E 0)4*- q> ".. 0 > E o w ~ 0-0 ID o a -= 0 CL :D LL %x0 a 15 C U w0 L-) u <- 0 ) Q> .C0 0 00 u M~" u- viZ Project "Ust-Kamenogorsk Environmental Remediation Project" financed under Agreement No. 4848-KZ between the Government of the Republic of Kazakhstan and the International Bank of Reconstruction and Development NOTES TO FINANCIAL STATEMENTS For the year ended 31 December 2016 1. PROJECT DESCRIPTION Kazakh business environment Operating environment in the Republic of Kazakhstan, Project activities are carried out in Kazakhstan. Accordingly, the project is exposed to risks incidental to economic and financial markets of Kazakhstan, which demonstrate characteristics of a country with developing market economy. The legal system, tax system and legislative base continue developing but are subject to various interpretations and frequent changes, which together with other legal and financial impediments intensify the problems encountered by the entities operating in Kazakhstan. Nature of operations Project "Ust-Kamenogorsk Environmental Remediation" (the "Project") is financed by the International Bank for Reconstruction and Development ("IBRD") and the Government of the Republic of Kazakhstan (the "Government"). Loan agreement No. 4848 KZ (the "'Agreement") between the Government and IBRD was signed on 2 February 2008 and ratified on 19 November 2008 ("inception date of the Project"). Under the Agreement IBRD provides a loan of 24,290,000 US dollars (the "Loan") for the Project's implementation purpose, and shall be repaid by the Government from 15 August 2012 through 15 February 2024, after the end of the grace period. In 2014 the amount of loan was decreased by 7,000,000 US dollars from 24,290,000 US dollars to 17,290,000 US dollars (Note 6). In accordance with approved budget for 2016, the receipt and expenditure of funds for the Project from the proceeds of the loan of IBRD and co-financing of external loans by the Government of the Republic of Kazakhstan had been planned in the amount of 1,496,162 US dollars and 911,850 US dollars, respectively (2015: 968,792 US dollars and 1,439,220 US dollars, respectively). The planned budget amounts are taken at the conditional exchange rate established by the Government of the Republic of Kazakhstan. The purposes of the Project are: * Prevent the groundwater contamination plume's further migration towards residential areas, the city's sources of drinking water, and eventually into Lrtysh River; and * Strengthen institutional mechanisms for groundwater quality monitoring to enable control of the ongoing groundwater pollution from local municipal and industrial sources. The Project is implemented by the Committee on water resources of the Ministry of Agriculture of the Republic of Kazakhstan which serves as the Executive agent for the Government of the Republic of Kazakhstan. Until 2014, the Executive Agent was the Committee on water resources of the Ministry of Environment and Water Resources of the Republic of Kazakhstan, but due to the reorganization of government agencies, the above mentioned Committee was transferred to the Ministry of Agriculture. The Project comprises the following components: Part A: Localization of the priority sources of ground water pollution Provision of design, civil works, construction and goods for the rehabilitation selected industrial contaminated sites, namely: * conic waste pile No. 6 Ust-Kamenogorsk Lead-zinc industrial Complex; * waste pile No. 6 of UMP; * waste pile No. 1 UK Heat Power Plant; * waste pile No. 1 Titanic and Magnesium Industrial Complex; * ash dump No. 2a and 2b UK Heat Power Plant; * waste pile of experimental Lead-zinc Industrial Complex; and * sludge storage unit of condenser plant. 3 Project "Ust-Kamenogorsk Environmental Remediation Project" financed under Agreement No. 4848-KZ between the Government of the Republic of Kazakhstan and the International Bank of Reconstruction and Development NOTES TO FINANCIAL STATEMENTS (continued) Part B: Remediation of Current Contaminated Groundwater Site * Provision of design, works, construction supervision and goods for the installation of the pump-and-treat groundwater remediation system, including the well field, pumping systems and treatment process, needed to remove contaminants from the subsurface by treating the contaminated groundwater that flows from beneath the City of Ust-Kamenogorsk Central Industrial Complex towards the residential areas, the location of the drinking wells, and the Irtysh River; * Implementation of the groundwater sampling and contamination analysis program for the detailed design and operation of the groundwater treatment system, including provision of new groundwater monitoring wells for sampling. Part C: Project Management and Monitoring Provision of financial and technical assistance to the Project Management Unit for: * project management, procurement and financial management; and * monitoring and evaluation of the Project impacts, including implementation of Environmental Management Plan for construction activities under the Project. Currently, project is completed; date of completion of the project is 31 December 2016. In 2015 the latest date of loan drawdown was extended from 31 December 2015 to 31 December 2016. 2. BASIS OF PREPARATION These financial statements have been prepared in accordance with the International Public Sector Accounting Standard (IPSAS) "Financial Reporting under the Cash Basis of Accounting" published by the International Federation of Accountants (IFAC), and in accordance with requirements of the International Bank of Reconstruction and Development. The approved Project budget broken down by categories of expenses under the loan agreement does not represent public information and accordingly comparison of the budget with the actual amounts is not presented. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies described below, have been consistently, applied in the reporting periods presented in these financial statements. Cash method of accounting Cash method of accounting recognizes transactions and events when cash under the Project is received or paid. Presentation currency of the financial statements These financial statements are presented in US dollars (hereinafter, the "US dollars"). Foreign currency transactions Transactions in foreign currency are translated into the reporting currency at the rate of exchange ruling at the date of such transactions. Direct payments from IBRD are translated into USD at the rate of exchange established by National Bank of the Republic of Kazakhstan at the date of reconversion. Receipts from the Government of the Republic of Kazakhstan are translated to US dollars at the foreign exchange rates established by the National Bank 4 Project "Ust-Kamenogorsk Environmental Remediation Project" financed under Agreement No. 4848-KZ between the Government of the Republic of Kazakhstan and the International Bank of Reconstruction and Development NOTES TO FINANCIAL STATEMENTS (continued) of the Republic of Kazakhstan at the date of reconversion. The foreign exchange differences arising upon translation of transactions denominated in other currencies in US dollars are presented as a net value from a change in foreign exchange rates. Category of expenses The agreement determines the main categories of expenditures financed by the Loan, quantity for each category as welt as a share of financing for each category. In accordance with the Agreement, there are the following categories of expenses: * Goods, services of consultants, operating expenses and training under the Project Cash receipt Based on the terms and conditions of the Agreement, the Government of the Republic of Kazakhstan is obliged to repay interest and principal of the Loan. These payments are recorded in the Government accounts and are not reflected in these financial statements. 15 February 2024 is the date of the last payment of the Government under the Loan. Allocation of expenses The allocation of expenses by components, in the report on receipt and expenditure of funds, is made on the basis of a comparison of the description of work in the Agreement and the description of work in the primary documents. 4. CASH To conduct operations on Loan No.4848 KZ, special accounts have been opened in the Department of the Treasury in Astana for making cash payments to suppliers: * 01.6201.000000000.ZO4848.001,2120360.2.0000.0000, US dollars * KZ780702012120360002, KZT The cash balances as at 31 December are as follows: US dollars 2016 2015 Balance at 31 December 1,360 1,364 Including balances denominated in: US dollars 1,360 1,361 Tenge - 3 5. DIRECT PAYMENTS AND REPLIENISHMENT OF ACCOUNT Direct payments under the Project are made by IBRD and the Government of the Republic of Kazakhstan directly to suppliers, which are determined in accordance with the terms and conditions of the Agreement. Direct payments for Suppliers and cash replenishments of the Project for the year ended 31 December 2016, were made according to the following withdrawal application: 5 Project "Ust-Kamenogorsk Environmental Remediation Project" financed under Agreement No. 4848-KZ between the Government of the Republic of Kazakhstan and the International Bank of Reconstruction and Development NOTES TO FINANCIAL STATEMENTS (continued) US dollars No. of withdrawal Date of Direct Replenishment Total application withdrawal Payments of account 1 21 July 2016 97,858 - 97,858 97,858 - 97,858 6. UNUSED PORTION OF LOAN In 2014 the amount of loan was decreased by 7,000,000 US dollars from 24,290,000 US dollars to 17,290,000 US dollars based on initiative of the Government of RK and in accordance with the letter of IBRD dated 22 December 2014. As of 31 December 2016 the balance of undrawn borrowing facilities of Loan from IBRD was 11,835,301 US dollars (2015: 11,933,159 US dollars). 7. PROJECT EXPENSES FOR CUMULATIVE TOTALS Statement of cash distribution of Project expenses for cumulative totals is as follows: Cumulative from the inception date of the Cumulative from the inception date of the project through 31 December 2015 project through 31 December 2016 Proceeds Proceeds from fromethe US dotlars IBRD loan the Government Total from the IBRD loan Total of te RKGovernment of the RK RECEIPTS Receipts to special - 3,830,125 3,830,125 - 3,830,125 account 3,830,125 Direct payments 1,526,716 7,061,567 8,588,283 1,624,574 7,456,556 9,081,130 Other Receipts 227 - 227 227 - 227 Total Receipts Under the 5,357,068 7,061,567 12,418,635 5,454,926 7,456,556 12,911,482 Project EXPENSES Part A: Construction works 5,321,988 2,324,061 7,646,049 5,419,846 2,367,644 7,787,490 Consulting Services - 2,314,619 2,314,619 - 2,484,848 2,484,848 5,321,988 4,638,680 9,960,668 5,419,846 4,852,492 10,272,338 Part B: Consulting Services - 1,520,656 1,520,656 1,643,956 1,643,956 - 1,520,656 1,520,656 - 1,643,956 1,643,956 Part C: Consulting Services - 902,231 902,231 960,108 960,108 - 902,231 902,231 - 960,108 960,108 Total Project Expenses 5,321,988 7,061,567 12,383,555 5,419,846 7,456,556 12,876,402 6 Project "Ust-Kamenogorsk Environmental Remediation Project" financed under Agreement No. 4848-KZ between the Government of the Republic of Kazakhstan and the International Bank of Reconstruction and Development NOTES TO FINANCIAL STATEMENTS (continued) Cumulative from the inception date of the Cumulative from the inception date of the project through 31 December 2015 project through 31 December 2016 Proceeds Proceeds US dollars Proceeds from fromte fromethe from the from the IBRD loan the Government IBRD loan IBRD loan of te RKGovernment Government ofthe RK of the RK Other expenses /(income) Fee withheld at replenishment of special 30 - 30 30 - 30 account Fee for conversion and servicing on a special 6,040 - 6,040 6,044 - 6,044 account Net expenses from change 27,646 - 27,646 27,646 - 27,646 in foreign exchange rates Total other project 33,716 - 33,716 33,720 - 33,720 expenses Total payment under the 5,355,704 7,061,567 12,417,271 5,453,566 7,456,556 12,910,122 program 8. DATE OF ISSUE These financial statements have been approved for issue by the Deputy Chairman of the Committee on water resources of the Ministry of Agriculture of the Republic of Kazakhstan and Head of the Department of Economy and Budget Planning of the Committee on water resources of the Ministry of Agriculture of the Republic of Kazakhstan on 29 May 2017. 7 BDO Kazakhstan LLP BDO Kazakhstan, a limited liability partnership, registered 6 Gabdullin Street under the taws of the Republic of Kazakhstan, is a member Almaty,of BD International Limited, a UK company Limited by Atmat, Al H4E3guarantee, and forms part of the international BDO network of Kazakhstan independent member firms. Tel: +7 727 331 31 34 BDO is the brand name forthe BDO network and foreach of Fax: +7 727 33131i35 the BDO Member Firms. www.bdokz.com