Small and Medium Enterprises Competitiveness Project Funded under Loan Agreement No. 8477-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development Financial Statements for the Year Ended December 31, 2018 And Independent Auditors' Report CONTENTS Independent Auditors' Report Financial statements Statement of receipts and disbursements of funds.................................................1 Statement of comparison of budget and actual amounts ...................................... 2-3 Statement of disbursements by component ...................................................... 4-5 Notes to the financial statements ................................................................ 6-10 Ten.: +7 727 331 31 34 TOO "BDO Kazakhstan" Qamc: +7 727 331 31 35 yn. Fa6Aynrnma, 6 JB D O info@bdokz.com AnmaThi, Ka3axCTaH www.bdokz.com A1 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 Al 5H4E3 Independent Auditors' Report To Management of the Small and Medium Enterprises Competitiveness Project funded under Loan Agreement No. 8477-KZ, between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development Opinion We have audited the accompanying financial statements of the Small and Medium Enterprises Competitiveness Project funded under Loan Agreement No. 8477-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development (hereinafter the "Project"), which comprise the statement of receipts and disbursements of funds for the year ended December 31, 2018, statement of comparison of budget and actual amounts for the year ended December 31, 2018, statement of disbursements by component for the year ended December 31, 2018, and a summary of significant accounting policies and other explanatory notes (the "financial statements"). In our opinion, the accompanying financial statements present fairly, in all material respects, the Project's receipts and disbursements for the year ended December 31, 2018 and the cash position as at December 31, 2018 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), as well as in accordance with the requirements of the international Bank for Reconstruction and Development. Basis for Opinion We conducted our audit in accordance with the international Standards on Auditing. 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 Project in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in Kazakhstan, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our opinion. Management's Responsibilities for the Financial Statements Management of the Project is responsible for the preparation and fair presentation of these financial statements in compliance with the International Public Sector Accounting Standard "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 for Reconstruction and Development, and for such internal control Independent Auditors' Report (continued) as management determines is necessary to enable preparation of the financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Project's ability to continue as a going concern, disclosing, as applicable, matters related to going concern, and using the going concern basis of accounting unless management either intends to liquidate the Project, or to cease its operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Project's financial reporting process. Auditor's Responsibilities for the Audit of the Financial Statements Our 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 our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or errors 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 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 of the 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 Project'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 we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Project to cease to continue as a going concern. Independent Auditors' Report (continued) *a Evaluate the overall presentation of the financial statements, its structure and content, including the disclosures, and whether the financial statements represent the underlying transactions and events in matter that achieves fair presentation. We communicate with those charged with managing the Project regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in the internal control that we identify during our audit. 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С й i: � с w�- � а � а г� � ro �, W� ' ° д � а U r�r а, Е а+ ; Q � � W�`1� � и5 i � й Li I � Н Small and Medium Enterprises Competitiveness Project Funded under Loan Agreement No. 8477-KZ, between the Government of the Republic of Kazakhstan and the Internationai Bank for Reconstruction and Deveiapment NOTES TO THE FINANCIAL STATEMENTS For the Year Ended December 31, 2018 1. GENERAL PROVISIONS Kazakhstan Business Environment The Project activities are carried out in Kazakhstan. Accordingly, the Project is exposed to risks specific to economic and financial markets of Kazakhstan, whose economy shows specific features of a developing market economy. The legal, tax and regulatory frameworks continue developing but are subject to varying interpretations and frequent changes which together with other legal and financial impediments contribute to the challenges faced by entities operating in Kazakhstan. Nature of Operations Loan Agreement No. 8477-KZ (the "Agreement") between the Government of the Republic of Kazakhstan (the "Government") and the International Bank for Reconstruction and Development ("IBRD") was initially signed on July 20, 2015 and ratified on December 2, 2015. Pursuant to the Agreement, IBRD lends the amount of 40,000,000 US dollars (the "Loan") and the Government provides co-financing of 6,000,000 US dollars from the republican budget ("Co-financing") for the purpose of implementing the Small and Medium Enterprises Competitiveness Project (the "Project"). The Loan shalt be repayable by the Government on May 15 and November 15 in each year, beginning from May 15, 2020 through November 15, 2031. On July 31, 2018 and September 14, 2018, the Ministry of Finance of the Republic of Kazakhstan sent letters requesting for partial cancellation of the funds of the above Loan in the amount of 22,000,000 US dollars. According to the letters from the World Bank, ref. No. 19/001 and No. 19/002 dated December 28, 2018, the following changes were made to the Agreement: " ... according to Section 7.01 of the General Conditions for Loans applicable to the Loan Agreement, the World Bank herewith cancels 22,000,000 US dollars of the Loan from August 6, 2018, in particular: The amount of 8,845,889 US dollars from the Category (1) "Goods, non-consulting services, consultant's services, and Training for Component 1 of the Project"; The amount of 13,154, 111 US dollars from the Category (2) "Goods, non-consulting services, consultants' services and Training for Components 2, 3 and 4 of the Project; The Bank set February 28, 2021 as a later date for the purposes of Section IV of Schedule 2 of the Loan Agreement". The IBRD provides a loan in the amount of 18,000,000 US dollars, while the Government of the Republic of Kazakhstan provides co-financing from the republican budget in the amount of 3,209,280 US dollars. The closing date for the toan has been extended from June 30, 2020 to February 28, 2021. The Project is implemented by the Ministry of National Economy of the Republic of Kazakhstan (hereinafter "MoNE"), which acts as an Implementing Agency on behalf of the Government of the Republic of Kazakhstan. As per the approved budget for 2018, the Project receipts and disbursements financed out of the proceeds of the IBRD Loan and from co-financing of the external loan by the Government of Kazakhstan were estimated to amount to 1,237,589 US dollars and 173,962 US dollars, respectively (2017: 1,111,521 US dollars and 88,424 US dollars, respectively). Small and Medium Enterprises Competitiveness Project Funded under Loan Agreement No. 8477-KZ, between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS (continued) Project Description The Project objective is to enhance the competitiveness and management capacity of targeted small and medium sized enterprises in Kazakhstan. The Project consists of the following components: Component 1: SME Capacity Building Program Strengthen and expand the existing consulting programs for SMEs, as indicated in the project implementation guidelines, including the Business Advisors network, by providing goods, training, and consulting services. Component 2: SME Linkages in Competitive Sectors 1. Supplier Development Activities: Implementing supplier development activities designed to increase the ability of SMEs to supply inputs into the local operations of multinational corporations, large local firms and state-owned enterprises by, inter alia, upgrading skills of suppliers, improving business and management practices, facilitating communication and relationships between potential SME suppliers and major buyers, and establishment of a supplier development office, all through the provision of goods, Training and consultants' services. 2. Competitive Sectors: Developing higher value-added production and increased competitiveness of SMEs in non-extractive sectors in and around priority geographic areas by institutional capacity strengthening, through the provision of Training and consultants' services. 3. Factoring Strategic Assessment: Conducting a detailed assessment for development of factoring and reverse-factoring in the territory of the Borrower, including an online platform for SMEs to register and verify their accounts receivables. Component 3: Impact Evaluation t Monitoring of SME Programs Strengthening monitoring and evaluation frameworks, public-private sector dialogue, and transparency of SME policy making through the provision of Training and consultants' services. Component 4: Project Management Provision of consultants' services and Training and payment of Operating Costs to implement, manage, and coordinate the Project. 2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS These financial statements have been prepared in accordance with International Public Sector Accounting Standard (IPSAS) "Financial Reporting under the Cash Basis of Accounting" as published by the International Federation of Accountants, and in compliance with the requirements of the International Bank for Reconstruction and Development. 3. 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 only when funds under the Project are received or paid. 7 Small and Medium Enterprises Competitiveness Project Funded under Loan Agreement No. 8477-KZ, between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS (continued) Presentation Currency These financial statements are presented in United States dollars ("US dollars"). Transactions in Foreign Currencies Transactions in foreign currencies are translated to the presentation currency at the exchange rates prevailing at the reconversion dates. Direct payments from the IBRD are translated into US dollars at the exchange rates set by the National Bank of the Republic of Kazakhstan at the payment dates. Proceeds from the Government of the Republic of Kazakhstan are translated into US dollars at the exchange rates established by the National Bank of the Republic of Kazakhstan at the date of payment. Exchange differences arising from translation of transactions denominated in other currencies into US dollars are reported as a net value from changes in exchange rates. Expenditure Categories The Agreement specifies the main categories of expenditures financed by the Loan, the amount for each category, as well as the percentage of expenditures to be financed in each category. According to the Agreement, there are the following categories of expenditures: 1) Goods, non-consulting services, consultants' services, and Training for Component 1 of the Project (percentage of expenditures to be financed (exclusive of taxes): 85%); and 2) Goods, non-consulting services, consultants' services, and Training for Components 2, 3, and 4 of the Project (percentage of expenditures to be financed (exclusive of taxes): 100%). Funds Received Subject to the terms and conditions of the Agreement, the Government of the Republic of Kazakhstan shall pay the interest and the principal amount of the Loan. Those payments are recorded in the accounts of the Government and are not reported in these financial statements. The last installment on the Loan shall be payable by the Government on November 15, 2031. Allocation of Expenditures Expenditures are allocated between the components in the statement of disbursements by component based on the comparison of work description in the Agreement with the work description in source documents. 4. CASH To perform transactions on Loan No. 8477-KZ, the following accounts have been opened with the Committee of Treasury of the Ministry of Finance of the Republic of Kazakhstan, the city of Nur-Sultan, for making cash payments to suppliers: * No. 01.6201.000000000.Z08477.001.2430001.2 in US dollars; * No. KZ120702012430001001 in KZT. Cash balances as at December 31, as well as the transactions of the account for the year ended December 31, 2018 are detailed below: B Small and Medium Enterprises Competitiveness Project Funded under Loan Agreement No. 8477-KZ, between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS (continued) in US Dollars 2018 2017 Balance as at January 01 657 179 RECEIPTS Replenishment of account 693,500 1,058,300 693,500 1,058,300 EXPENDITURES Expenditures under the Project 692,434 1,057,822 Net foreign exchange loss - - 692,434 1,057,822 Balance as at December 31 1,723 657 Including those denominated in: US Dollars 1,720 631 KZT 3 26 5. DIRECT PAYMENTS AND REPLENISHMENT OF THE ACCOUNT Direct payments under the Project are made by IBRD and the Government of Kazakhstan directly to the suppliers determined according to the criteria given in the Operational Manual of the Project. Direct payments to suppliers and replenishment of the account under the Project for the year ended December 31, 2018 were based on the following withdrawal applications: US Dollars No. of withdrawal Date of withdrawal Direct Replenishment Total application payments of account MNE-15 02.03.2018 8,100 8,100 MNE-16 16.04.2018 430,000 430,000 MNE-17 31.10.2018 24,000 24,000 MNE-18 27.09.2018 244,700 - 244,700 MNE-19 23.10.2018 272,000 - 272,000 MNE-20 10.12.2018 231,400 231,400 Total 516,700 693,500 1,210,200 Statement of Expenditures US Dollars Actual expenditures by category Goods, Goods, non-consulting non-consulting No. of Total services services, withdrawal Value date amount of consultants' application the cslan services, and Total Application services, and Training for Training for Component 1 of Components 2, 3, CmPoet 1of and 4 of the the ProjectPrjc Project MNE-15 02.03.2018 8,100 - MNE-16 16.04.2018 430,000 - 9 Small and Medium Enterprises Competitiveness Project Funded under Loan Agreement No. 8477-KZ, between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS (continued) Actual expenditures by category Goods, Goods, non-consulting Total non-consultin servis No. of amount of g services, srie, withdrawal Value date t of gservices, consultants' application te cslan services, and Total Application services, and Training for Training for Component I Components 2, 3, and 4 of the of the Project Proe Project MNE-17 31.10.2018 24,000 549,087 549,087 MNE-20 10.12.2018 231,400 - - Total 693,500 549,087 549,087 6. UNUSED PORTION OF THE LOAN As at December 31, 2018, the unused portion of the IBRD toan totaLed 15,164,049 US dollars (2017: 16,374,249 US dollars). 7. DATE OF ISSUE These financial statements were approved for issue by the Vice Minister of the Ministry of National Economy of the Republic of Kazakhstan on June 07, 2019. 10 Small and Medium Enterprises Competitiveness Project Funded under Loan Agreement No. 8477-KZ, between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development Appendix No. 1 Reconciliation between the data provided by Project Management Unit and World Bank payments data US Dollars Application for Date of withdrawal withdrawal As per PMU As per WB Variance MNE-15 02.03.2018 8,100 8,100 MNE-16 16.04.2018 430,000 430,000 MNE-17 31.10.2018 24,000 24,000 MNE-18* 27.09.2018 244,700 244,700 MNE-19* 23.10.2018 272,000 272,000 MNE-20 10.12.2018 231,400 231,400 Total 1,210,200 1,210,200 ')application for direct payment 11