AUDITD%e,FNrALS OFFICE PAPUA NEW GUINEA Phone: (+675) 3012200 Fax: (+675) 325 2872 Email: agopng@aqo gov.pg WebsiLe: www.ago.gov.pg Our Reference: 67-16-4 The Honourable Rainbo Paita, MP Minister for Communication and Energy (Telikom Limited and PNG Power Limited) Office of the Minister PO Parliament Haus WAIGANI National Capital District INDEPENDENT A UDIT REPORT ON PNG ENERGY SECTOR DEVELOPMENT PROJECT - COMPONENT 2 (IDA CREDIT NO: 5201-PG & GEF GRANT NO. TF014583) FOR THE YEAR ENDED 31 DECEMBER 2017 OPINION In accordance with Section 8(4) of the Audit Act, 1989 (as amended), I have audited the Statement of Receipts and Payments (the "Statement") of the PNG Energy Sector Development Project - Component 2 (the "Project") for the year ended 31 December 2017 and notes to the financial statements including a summary of significant accounting policies. In my opinion, the accompanying financial statements; i) are based on proper accounts and records; ii) are in agreement with those accounts and records and present fairly, in all material respects, the Project's financial performance for the year ended 31 December 2017; iii) comply with generally accepted accounting practice and statutory requirements in Papua New Guinea; and iv) are in compliance with relevant provisions set out in the Loan Agreement IDA Credit No. 5201-PG and GEF Grant No. TF014583. Leve 6 PO Box 423 TISA Investment Haus WAIGANI, NCD Kumil Avenue, NCD Papua Newn GInfea Audit Report on IDA Funded PNG Energy Sector Development Project - Component 2for the year ended 31December 2017 BASIS FOR OPINION I conducted my audit in accordance with International Standards on Auditing and the Audit Act, 1989 (as amended). My responsibilities under those standards are further described in the Auditor-General's responsibilities for the audit of the financial statements section of my report. I am independent of the PNG Energy Sector Development Project - Component 2 in accordance with the ethical requirements that are relevant to my audit of the financial statements in Papua New Guinea, and I have fulfilled my other ethical responsibilities in accordance with these requirements. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion. Responsibilities of the Project Management and those charged with Governance for the Financial Statements ( The Departmental Head overseeing the Project Implementation Unit (PIU) at the PNG Power Limited (PPL) is responsible for the preparation and fair presentation of the financial statements submitted under Section 63(3) of the Public Finance (Management) (Amendment) Act 2016 in accordance with the International Public Sector Accounting Standards: Financial Reporting under the Cash Basis of Accounting in compliance with relevant provisions set out in the IDA Credit No. 5201-PG and GEF Grant No. TF014583 and for such internal control as management determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. Those charged with governance are responsible for overseeing the financial reporting process of PNG Energy Sector Development Project - Component 2. Auditor-General's Responsibilities for the Audit of the Financial Statements My objectives are 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 International Standards on Auditing 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 this financial statements. As part of an audit in accordance with International Standards on Auditing, I exercise professional judgement and maintain professional scepticism throughout the audit. I also; Audit Report on IDA Funded PNG Energy Sector Development Project - Component 2 forthe year ended 31 December 2017 * Identify and assess the risks of material misstatement of the statement of cash receipts and payments, 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 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. * 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 entity's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. * Conclude 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 my audit report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my report. However, future events or conditions may cause the Project to cease to continue as a going concern. * Evaluate the overall presentation and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. I 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 I identify during my audit. GORDON KEGA MBA, CPA Acting Auditor-General 9 September 2019 O PIG POWER Ltd PNG ENERGY SECTOR DEVELOPMENT PROJECT - COMPONENT 2 TECHNICAL ASSISTANCE FOR THE PREPARATION AND PLANNING FOR PORT MORESBY HYDROPOWER SUPPLY SPECIAL-PURPOSE CASH BASIS PROJECT FINANCIAL STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2017 PNG ENERGY SECTOR DEVELOPMENT PROJECT - COMPONENT 2 SPECIAL-PURPOSE CASH BASIS PROJECT FINANCIAL STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2017 TABLE OF CONTENTS PAGE NO. Independent Auditor's Report 1-2 Statement by the Project Management Unit 3 Statement of Cash Receipts and Payments 4 Statement of Comparison of Budget and Actual 5 Notes to Statement of Source and Use of Funds 6-8 PNG ENERGY SECTOR DEVELOPMENT PROJECT - COMPONENT 2 PROJECT MANAGEMENT UNIT REPORT FOR THE YEAR ENDED 31 DECEMBER 2017 STATEMENT BY THE PROJECT MANAGEMENT UNIT In the opinion of the Project Management Unit: a) The Special-Purpose Cash Basis Financial Statement of the Project is drawn up so as to exhibit a true representation of the Project for the year ended 31 December 2017. b) The Statement of Cash Receipts and Payments and Statement of Comparison of Budget and Actual Amounts are drawn up so as to exhibit a true representation of how the funds are used as per the Project Agreement and Subsidiary Project Agreement between PPL, World Bank and the Government of PNG respectively. c) The Notes to the Special-Purpose Cash Basis Financial Statement including the Accounting Policies are drawn up so as to exhibit true representation of the operation and state of affairs of the Project for the year ended 31 December 2017. Additional Statutory Information The results of the Project during the financial year have, in the opinion of the Project Management Unit, not been materially affected by items of an abnormal nature, other than those disclosed in the Special- Purpose Cash Basis Financial Statement. No contingent liability has arisen since the end of the financial year, which continues to exist at the date of this report, other than those disclosed in the Special-Purpose Cash Basis Financial Statement. At the date of this report the Project Management Unit are not aware of any circumstances that would render the values attributed to balances in the Special-Purpose Cash Basis Financial Statement misleading. For and on behalf of the Project Management Unit: Kero TOM Mlir69 VILLA Project Accountant Ma }ger Project Finance Nime SIRIA Bernadette OMBU Project Director Financial Controller Date this day of H4 2019 Page 3 of 8 't PNG ENERGY SECTOR DEVELOPMENT PROJECT - COMPONENT 2 SPECIAL-PURPOSE CASH BASIS PROJECT FINANCIAL STATEMENT STATEMENT OF CASH RECEIPTS AND PAYMENTS FOR THE YEAR ENDED 31 DECEMBER 2017 Note 2017 2016 Receipts / Payments by Receipts / Payments Payments Third Parties Payments by Third Controlled by the Controlled by Parties Entity the Entity RECEIPTS PGK PGK PGK PGK IDA -World Bank 4 1,156,144.27 822,908.45 5,592,083.09 5,592,083.09 Counterpart - GoPNG 0.00 000 0.00 0 00 Other-PPL Temporary Relief 5, 8 264,002.25 0.00 79,244.10 0 00 Overhead Receipts Other - PPL Reimbursable Support 8 0.00 0.00 443,587.98 0 00 Total Receipts 1,420,146.52 822,908.45 6,114,915.17 5,592,083.09 PAYMENTS Consultant Payment 6 822,908.45 822,908.45 6,034,471.07 5,592,083.09 Training Payment 0.00 0.00 0.00 0.00 Bank Charges 314.43 0.00 351.09 0.00 Refund to World Bank 0.00 0.00 0.00 0.00 Project Overhead Payment 7 263,802.25 0.00 80,244.10 0.00 Reimbursements made to PPL 8 0.00 0.00 211,260.14 0.00 Foreign Contractor Witholding Tax - 396,510.23 0.00 0.00 0.00 IRC Minor Operational Expenditures paid 1,678.21 0.00 0.00 0.00 from IDA Trust Account Total Payments 1,485,213.57 822,908.45 6,326,326.40 5,592,083.09 Increase I (Decrease) in Cash (65,067.05) 0.00 (211,411.23) 0.00 Cash at Beginning of Year 420,669.06 632,080.29 Increase / (Decrease) in Cash (65,067.05) (211,411.23) Cash at End of Year 355,602.01 420,669.06 Pg4f Page 4 of 8 PNG ENERGY SECTOR DEVELOPMENT PROJECT - COMPONENT 2 SPECIAL-PURPOSE CASH BASIS PROJECT FINANCIAL STATEMENT STATEMENT OF COMPARISION OF BUDGET AND ACTUAL AMOUNT FOR THE YEAR ENDED 31 DECEMBER 2017 Actual Amounts Final Budget Original Difference Final Budget Budget and Actual PGK PGK PGK PGK CASH INFLOWS IDA 1,156,144.27 0.00 000 (1 156,144.27) Counterpart 0.00 000 0 00 0.00 Other - PPL Temporary Relief Overhead 264,002.25 0.00 0.00 (264,002.25) Receipts Other - PPL Reimbursable Support 0.00 0.00 0.00 0 00 Total Receipts 1,420,146.52 0.00 0.00 (1,420,14652) CASH OUTFLOWS Consultant Payment 822,908.45 0.00 0 00 (822,908 45) Trainning Payment 0.00 0.00 0.00 0.00 Bank Charges 314.43 0.00 0.00 (31443) Refunds to World Bank 0.00 0.00 0.00 0 00 Project Overhead Payment 263,802 25 0.00 0.00 (263,802.25) Foreign Contractor Witholding Tax - IRC 396,510 23 0.00 0.00 (396,510.23) Minor Operational Expenditures paid from IDA 1,678 21 0.00 0 00 (1,678.21) Trust Account Total Payments 1,485,213.57 0.00 0.00 (1,485,213.57) NET CASH FLOWS (65,067.05) 0.00 0.00 65,067.05 Page 5 of 8 PNG ENERGY SECTOR DEVELOPMENT PROJECT - COMPONENT 2 SPECIAL-PURPOSE CASH BASIS PROJECT FINANCIAL STATEMENT NOTES TO THE STATEMENT OF SOURCE AND USE OF FUNDS FOR THE YEAR ENDED 31 DECEMBER 2017 NOTE I - DESCRIPTION OF THE PROJECT In February 2012, the World Bank (WB) Board of Executive Directors approved the Energy Sector Development Project - P101578 (The "Project"), an approximately US$8 million technical assistance financed by an IDA credit and a grant from the Global Environment Facility. The Project became effective on November 27, 2013 and comprises two components, as follows: Component 1 to be implemented by the Energy Division at the Department of Petroleum and Energy (DPE), and Component 2 to be implemented by PNG Power Ltd (PPL). Component 1: Institutional and Policy Development for Renewable Energy and Rural Electrification. (a) Energy Policy Development i. Development of a renewable energy policy for the GoPNG. ii. Development of a rural electrification policy for the GoPNG. (b) Institutional and Strategy Development i. Strategic environmental and social assessment of the policies to be developed. ii. Development of a rural electrification strategy for the Recipient, including inter alia (A) initial data to define resources and demand for rural electrification; (B) an analysis of alternative models of community and rural electrification initiatives, including cost structure, as input to the process for developing tariffs for electricity supply; and (C) a methodology for screening social and environmental aspects of rural electrification initiatives. (c) Capacity Building i. Strengthening the capacity of GoPNG's institutions, for their role in oversight of the preparation and the development of electricity projects in the medium term including the Naoro Brown Hydropower Project, with inter alia the environmental and social safeguard aspects. ii. Strengthening Project management through effective and efficient operational management, procurement and financial management, including through initial operation of DPE regional offices and training. Component 2: Technical Assistance for Preparation and Planning for Port Moresby Hydropower Supply. a) Preparation of the Naoro Brown Hydropower Project for Port Moresby Strengthening the institutional capacity of the PNG Power in the areas of technical, financial, legal, economic, social, environmental (including the Social and Environmental Expert Panel, the Dam Safety Expert Panel and the Environmental and Social Management Framework, further feasibility study work including drilling and grouting trials, preparation of a geological baseline assessment), communications, procurement, and Project management as required to: (i) prepare the Naoro Brown Hydropower Project; (ii) select a Naoro Brown Project Developer; and (iii) provide support through financial close and technical assistance required for additional assessments and feasibility studies and economic analysis. b) Improved Planning Related to Hydropower Supply for Port Moresby i. A three-basin inventory study of the Brown, Vanapa and Angabanga Basins; ii. Institutional strengthening and capacity building for the Project Implementing Entity, the Electricity Management Committee and supporting staff, in areas critical for implementation of improved performance and implementation of hydropower projects, such as planning capacity, project evaluation, preparation and negotiation of power purchase agreements, procurement, financial management, social and environmental aspects and communications. Page 6 of 8 PNG ENERGY SECTOR DEVELOPMENT PROJECT - COMPONENT 2 SPECIAL-PURPOSE CASH BASIS PROJECT FINANCIAL STATEMENT NOTES TO THE STATEMENT OF SOURCE AND USE OF FUNDS FOR THE YEAR ENDED 31 DECEMBER 2017 NOTE 2 - BASIS OF PRESENTATION Statement of compliance This Special-Purpose Cash Basis Project Financial Statement has been prepared in accordance with the International Public Sector Accounting Standard (IPSAS) "Financial Reporting under the Cash Basis of Accounting" promulgated by the International Federation of Accountants. Basis of measurement This special-purpose cash basis project financial statement has been prepared on a historical cost basis. Functional and presentation currency This special-purpose cash basis project financial statement is prepared in Kina (K), which is the Project's functional and presentation currency. All values are rounded off to the nearest Kina, unless otherwise indicated. NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES 3.1 Foreign currency transactions and translation Transactions in foreign currencies are recorded by the Project at the respective functional currency rates prevailing at the date of the transaction. 3.2 Taxes Goods and Services Tax (GST) Expenditures are recognized net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognized as part of the expense. NOTE 4 - IDA: WORLD BANK DIRECT PAYMENT The Project is also allowed to advise World Bank via its Client Connection payment process to pay project goods and service providers directly from the World Bank headquarter. During the year a total of K822,908.45 were paid. The project has also received reimbursement from the world bank amounting to K333,235.82 during 2017. Currency Amount PGK Equivalent USD 45,400.22 147,883.45 AUD 228,367.18 576,539.21 GBP 16,210.00 71,916.59 PGK 333,235.82 333,235.82 TOTAL 1,156,144.27 NOTE 5 - PPL TEMPORARY SUBSIDY PPL subsidized a total of K264,002.55 for overhead related expenses due to GoPNG funds not received during the year to cover operational expenditures. Page 7 of 8 PNG ENERGY SECTOR DEVELOPMENT PROJECT - COMPONENT 2 SPECIAL-PURPOSE CASH BASIS PROJECT FINANCIAL STATEMENT NOTES TO THE STATEMENT OF SOURCE AND USE OF FUNDS FOR THE YEAR ENDED 31 DECEMBER 2017 NOTE 6 - CONSULTANT PAYMENTS During the year a total of K822,908.45 were paid to individual consultants and consulting firms, all of the payments were paid directly offshore by World Bank via its Client Connection payment process. NOTE 7 - PROJECT OVERHEAD PAYMENT During the year a total of K263,802.69 were paid as overhead expenses. NOTE 8 - UNREIMBURSED PROJECT PAYMENTS TO PPL OPERATING ACCOUNT A total of K264,002.69 were still outstanding and not yet reimbursed to PPLs' main Operating Bank Account for project overhead expenditure paid by PPL. Onshore Payments and Reimbursement Statement Onshore Payments 398,188.44 PPL Temporary Subsidy Payment 263,802.25 Total Payments 661,990.69 Total Payments Reimbursed via SWAP Chq 398,188.44 TOTAL REIMBURSED 398,188.44 Unreimbursed Payments 263,802.69 GoPNG Bank deposit by PPL 200.00 TOTAL UNREIMBURSED 264,002.69 In 2017, including the temporary subsidy PPL has provided support to the project for a total of K661,990.69 which was paid directly to the suppliers. During the year the project reimbursed PPL K398,188.44 leaving an amount of K264,002.69 yet to be reimbursed as at 31 December 2017. NOTE 9 - SUBSEQUENT EVENTS From the end of the financial year to the date on which the report was authorized for issue, there were no material subsequent events. P 8 Page 8 of 8