TRANSPORT REFORM AND REHABILITATION CENTER LOAN NO 8402-GE (THIRD SECONDARY AND LOCAL ROADS PROJECT) Special Purpose Project Financial Statements For the Year Ended 31 December 2015 TRANSPORT REFORM AND REHABILITATION CENTER THIRD SECONDARY AND LOCAL ROADS PROJECT LOAN NO.8402-GE TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015: 1 INDEPENDENT AUDITORS' REPORT 2-3 SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015: Statement of Sources and Uses of Funds 4 Balance Sheet Statement 5 Statement of Expenditure Withdrawal Schedule 6 Special Account Statement 7 Notes to the Special Purpose Project Financial Statements 8-12 TRANSPORT REFORM AND REHABILITATION CENTER THIRD SECONDARY AND LOCAL ROADS PROJECT LOAN NO.8402-GE STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 Management of the Third Secondary And Local Roads Project (the "Project") implemented by the Transport Reform and Rehabilitation Center ("TRRC") is responsible for the preparation of the special purpose project financial statements that present fairly the financial position of the Project as at 31 December 2015, and its sources and uses of funds and movement in special account for the year ended 31 December 2015, in compliance with the Cash Basis International Public Sector Accounting Standard, Financial Reporting under the Cash Basis of Accounting ("IPSAS - Cash Basis"), and in conformity with the World Bank's Financial Management Sector Board's "Guidelines Annual Financial Reporting and Auditing for World Bank Financed Activities" (the "World Bank Guidelines"). In preparing the special purpose project financial statements, management is responsible for: * Properly selecting and applying accounting policies * Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; * Providing additional disclosures when compliance with the specific requirements in IPSAS - Cash Basis, are insufficient to 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 special accounts: * Making an assessment of the Projects ability to continue as a going concern. Management is also responsible for: * 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, and which enable them to ensure that the special purpose project financial statements of the Project comply with the Guidelines on Annual Financial Reporting and Auditing for World Bank - Financed Activities issued by the World Bank's Financial Management Sector Board; * 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 2015 were authorized for issue on 30 June 2016 by the Management. On behalf of Management: Giorgi Tsagareli < Marina Majagalatife Director Financial Manager 30 June 2016 30 June 2016 1 KPMG Georgia LLC 2nd Floor, Besiki Business Centre 4, Besiki Street 0108 Tbilisi, Georgia Telephone +995 322 93 5713 Fax +995 322 98 2276 Internet www.kpmg.ge Independent Auditors' Report To the management of the Transport Reform and Rehabilitation Center We have audited the accompanying special purpose project financial statements of the Third Secondary And Local Roads Project (the "Project"), financed under the International Bank for Reconstruction and Development (the "IBRD"), Loan Agreement No. 8402-GE dated 9 July 2014, implemented by the Transport Reform and Rehabilitation Center (the "Center'), which comprise the Statement of Balance Sheet as at 31 December 2015 and the Statements of Sources and Uses of Funds, Statement of Expenditure Withdrawal Schedule ("SOEs") and Special Account Statement for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. The special purpose project financial statements have been prepared by management in accordance with the International Public Sector Accounting Standard: Financial Reporting Under the Cash Basis of Accounting and in conformity with the World Bank's Financial Management Sector Board's "Guidelines: Annual Financial Reporting and Auditing for World Bank-Financed Activities" (the "World Bank Guidelines") as described in Note 2 to the special purpose project financial statements. Management's Responsibility for the Special Purpose Project Financial Statements Management is responsible for the preparation and fair presentation of these special purpose project financial statements in accordance with the International Public Sector Accounting Standard: Financial Reporting Under the Cash Basis of Accounting and the World Bank Guidelines, for determining the acceptability of the basis of accounting, 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. Auditors' Responsibility Our responsibility is to express an opinion on these special purpose project financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the special purpose project financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the special purpose project financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the special purpose project financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the special purpose project financial statements 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. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the special purpose project financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to KPMG Georg,a LLC, a company ncorporated under the Laws of Georga a merber frm of the KPMG retwork o' r'deoe t, nember firms affiatec wth KPMG Inernat,oral Coopeave KP. MG r!eratonar) a Swiss entity Transport Reform and Rehabilitation Center Independent Auditors' Report We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion Opinion In our opinion, the special purpose project financial statements for the year ended 31 December 2015 present fairly, in all material respects, the financial position of the Project as at 31 December 2015, and its sources and uses of funds for the year then ended in accordance with the International Public Sector Accounting Standard: Financial Reporting Under the Cash Basis of Accounting and the World Bank Guidelines Other Matters The special purpose project financial statements of the Project as at and for the year ended 31 December 2014 were audited by other auditors whose report dated 22 June 2015 expressed an unmodified opinion on those statements. Data included on pages 4 to 12 of the accompanying special purpose project financial statements that are marked as "Unaudited" have not been audited. Basis of Accounting Without modifying our opinion, 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 Center to comply with the requirements of IBRD and for providing information to the Government of Georgia and IBRD to assist them in evaluating the Project implementation. As a result, the special purpose project financial statements may not be suitable for another purpose KPMG Georgia LLC 30 June 2016 3 TRANSPORT REFORM AND REHABILITATION CENTER THIRD SECONDARY AND LOCAL ROADS PROJECT LOAN NO. 8402-GE STATEMENT OF SOURCES AND USES OF FUNDS FOR THE YEAR ENDED 31 DECEMBER 2015 (in US Dollars) Actual Planned Variance Year to Cumulative Year to Cumulative Year to Cumulative date to date date to date date to date Unaudited Unaudited Unauditedj Unaudited FUNDS RECEIVED BY SOURCES International Bank for Reconstruction and Development 11 758,713 15 946,213 ("IBRD") Funds Government of Georgia 2 416810 3 187.656 ("GoG") co-financing Z416,81 0 _3_187,656 TOTAL FUNDS RECEIVED 14,175,523 19,133,869 LESS: EXPENDITURES Component 1 - Rehabilitation and Improvement of Selected Secondary 9,108,238 12,166,577 9.108,238 12,166.577 and Local Roads (IBRO - 80%) Component 2 - Institutional Strengthening and Project - - - Management (IBRD - 80%) IBRD TOTAL 9,108,238 12,166,577 9,108,238 12,166,577 - Component 1 - Rehabilitation and Improvement of Selected Secondary 2,416,810 3.187,656 2,416,810 3,187.656 and Local Roads (GoG -20%) Component 2 - Institutional Strengthening and Project - - - Management (GoG - 20%) GoG TOTAL 2,416,810 3187,656 2,416,810 3,187,656 TOTAL EXPENDITURES BY 11,525,048 15,354,233 11,526,048 15,354,233 COMPONENTS UNALLOCATED Front end fees - 187.500 - 187,500 - TOTAL UNALLOCATED - 187,500 - 187,500 - EXPENDITURES TOTAL PROJECT EXPENDITURES 11,525,048 15,541,733 11,525,048 15,541,733 - NET FLOWS OF FUNDS 2,650,475 3,592,136 The special purpose project financial statements were approved by the management of Transport Reform and Rehabilitation Center on 30 June 2016 and were signed on its behalf by: A4 4 c,7 Giorgi Tsagareli Marina MajaIlidze Director Financial Manager 30 June 2016 30 June 2016 The notes on pages 8 to 12 form an integral part of these special purpose project financial statements. 4 TRANSPORT REFORM AND REHABILITATION CENTER THIRD SECONDARY AND LOCAL ROADS PROJECT LOAN NO. 8402-GE BALANCE SHEET STATEMENT AS OF 31 DECEMBER 2015 (in US Dollars) 31 December 2015 ASSETS IBRD Special Account 3,592,136 TOTAL ASSETS 3,592,136 Funds received: Funds received from lBRD 15,946,213 Funds received from GoG 3,187,656 Total funds received 19,133,869 Project expenditures: Financed by IBRD (12,166,577) Financed by GoG (3,187,656) Unallocated (187.500) Total project expenditures (15,541,733) TOTAL PROJECT EXPENDITURES AND OTHER FUNDS 3,592,136 The special purpose project financial statements were approved by the management of Transport Reform and Rehabilitation Center on 30 June 2016 and were signed on its behalf by: Giorgi Tsagareli Marina Majagaladze Director Financial Manager 30 June 2016 30 June 2016 The notes on pages 8 to 12 form an integral part of these special purpose project financial statements. 5 TRANSPORT REFORM AND REHABILITATION CENTER THIRD SECONDARY AND LOCAL ROADS PROJECT LOAN NO. 8402-GE STATEMENT OF EXPENDITURE WITHDRAWAL SCHEDULE FOR THE YEAR ENDED 31 DECEMBER 2015 (in US Dollars) Withdrawal Withdrawal Total SOE Total SOE Total SOE Attributable Attributable Attributable Total SOE No. application in attributable attributable to 2015 - to 2015 - to 2015 - attributable date withdrawal to 2014 to 2015 Component Component Component to 2016 schedule 1 2 3 Unaudited 2 17-Feb-15 3,682,181 3,058,339 623,842 623,842 - - - 3 7-Jul-15 2,864,125 - 2,864,125 2,864,125 - - - 4 30-Oct-15 3,300,414 - 3,300,414 3,300,414 - - - 5 15-Dec-15 1,147,486 - 1,147,486 1,147,486 - - - 6 16-Mar-16 462,757 - 248,713 248,713 - - 214,044 11,456,963 3,058,339 8,184,580 8,184,580 - 214,044 The special purpose project financial statements were approved by the management of Transport Reform and Rehabilitation Center on 30 June 2016 and were signed on its behalf by: Giorgi Tsagareli Marina Maja4aladze Director Financial Manager 30 June 2016 30 June 2016 The notes on pages 8 to 12 form an integral part of these special purpose project financial statements. 6 TRANSPORT REFORM AND REHABILITATION CENTER THIRD SECONDARY AND LOCAL ROADS PROJECT LOAN NO. 8402-GE SPECIAL ACCOUNT STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2015 (in US Dollars) Account No. 202250038 Depository Bank State Treasury Address 16 V Gorgasali street Tbilisi, 0114 Georgia Balance as at 1 January 2015 941,661 ADD Funds received from IBRD 11,758,713 DEDUCT Funds used for the Project expenditures (9,108,238) Balance as at 31 December 2015 3,592,136 The special purpose project financial statements were approved by the management of Transport Reform and Rehabilitation Center on 30 June 2016 and were signed on its behalf by: -77 Giorgi Tsagareli Marina Majagikide Director Financial Manager 30 June 2016 30 June 2016 The notes on pages 8 to 12 form an integral part of these special purpose project financial statements. 7 TRANSPORT REFORM AND REHABILITATION CENTER THIRD SECONDARY AND LOCAL ROADS PROJECT LOAN NO. 8402-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 fin US Dollars) 1. BACKGROUND The Investment Center for Euro-Asian Transport Corridor was established in 1995 as a non- entrepreneurial and non-profit legal entity under the laws of Georgia in accordance with the Georgian Presidential Decree N 119 dated 16 April 1995 The founder of the Investment Center for Euro-Asian Transport Corridor is the Georgian Government. A project unit named "Transport Reform and Rehabilitation Center" (the "Center") was formed within the Investment Center for Euro-Asian Transport Corridor. The Center's principal activity is to manage allocated credits/loans received from the International Development Association ("IDA"), the International Bank for Reconstruction and Development ("IBRDT). the Asian Development Bank (ADB) and the European Investment Bank (EIB) and monitor the implementation of transport sector projects. The Center implements the Third Secondary and Local Roads Project (the "Project"), financed under the International Bank for Reconstruction and Development (the "IBRD"). Loan Agreement No.8402- GE (the "Agreement") in the amount of 75 million United States Dollars ("USD") was signed between the Government of Georgia ("GoG") and IBRD on 9 July 2014 ("inception"). The main objectives of the Project are: rehabilitation and improvement of about 200 kilometers of secondary and local roads, preparation of designs and supporting studies for future transport projects and strengthening the capacity of Government of Georgia, Road Department of the Ministry of Regional Development and Infrastructure of Georgia (RDMRDI), 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES Statement of compliance - These special purpose project financial statements have been prepared in accordance with the Cash Basis International Public Sector Accounting Standard, Financial Reporting under a Cash Basis of Accounting and in conformity with the World Bank's Financial Management Sector Board's "Guidelines: Annual Financial Reporting and Auditing for World Bank- Financed Activities" (the "World Bank Guidelines"). The purpose of these special purpose project financial statements is to provide information to the Government of Georgia and International Bank for Reconstruction and Development (IBRD) to assist them in evaluating the Project implementation. Cash basis of accounting - Project financing is recognized as a source of project funds when the cash is received. Project expenditures are recognized as a use of the Project funds on the cash basis when the payments are made Presentation currency - The national currency of Georgia is the Georgian Lari ("GEL"). These special purpose project financial statements are presented in United States Dollars ("US Dollar" or "USD"), since management believes that this currency is more meaningful for the users of the special purpose project financial statements. All financial information presented in USD has been rounded to the nearest USD unless otherwise stated. Transactions in other currencies - Transactions in currencies other than the presentation currency are converted to US Dollars at the exchange rate prevailing at the date of the transaction. Cash - Cash represents the balances with the State Treasury of Georgia. 8 TRANSPORT REFORM AND REHABILITATION CENTER THIRD SECONDARY AND LOCAL ROADS PROJECT LOAN NO. 8402-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in US Dollars) 3. SPECIAL ACCOUNT The special account is a designated disbursement account of the Project that will be maintained in US Dollars at the State Treasury of Georgia to ensure the payment of eligible expenditures, within defined limits, which do not require individual authorization from IBRD in accordance with the Agreement. 4. BASIS OF FUNDING According to the terms of the Agreement, the expenditures of all works, goods and consultant services contracts, including all applicable taxes are co-financed by proceeds received from IBRD and the GoG at a proportional rate of 80% and 20%, respectively. The land acquisition and associated resettlement costs are funded entirely by the GoG. 5. METHODS OF WITHDRAWAL The methods of withdrawal used from the inception of the loan to 31 December 2015 were as follows: (a) Special Account The Center withdraws the eligible amounts from the special account and prepares and sends replenishment requests to the World Bank with authorized signatures. The replenishment requests and respective documentation are reviewed by the World Bank and an approved amount is transferred to the special 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 World Bank directly to third parties. The Center 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 GOG are accumulated. The funds are further disbursed to sub-contractors based on the share of expenditures to be incurred. The project has a common GEL account and special organization code for their funds in the State Treasury of Georgia. 6. STATEMENT OF EXPENDITURES (SOE) 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) Goods and non-consulting services valued at less than USD 300,000; (iii) Consultant services contracts (firms) valued at less than USD 200,000. (iv) Consultant services contracts (individuals) valued at less than USD 50,000. 9 TRANSPORT REFORM AND REHABILITATION CENTER THIRD SECONDARY AND LOCAL ROADS PROJECT LOAN NO. 8402-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in US Dollars) 7. RECONCILIATION OF AMOUNTS SHOWN AS RECEIVED FROM THE IBRD TO ACTUAL EXPENDITURES OF THE PROJECT 31 December 2015 Application of Withdrawals Schedule Expenses incurred in 2015 as per the Applications of Withdrawals Schedule 9,108,238 Expenses incurred in 2015 without Applications of Withdrawals Schedule - 9,108,238 IBRD funds received in 2015 11,758,713 Add: Opening Balance Special Account 941,661 941,661 Less: Closing Balance Special Account 3,592,136 3,592,136 TOTAL EXPENDITURES INCURRED IN 2015 9,108,238 10 TRANSPORT REFORM AND REHABILITATION CENTER THIRD SECONDARY AND LOCAL ROADS PROJECT LOAN NO. 8402-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in US Dollars) 8. PROJECT EXPENDITURES BY COMPONENTS Actual Planned Variance Project activities Year to Cumulative Year to Cumulative Year to Cumulative date to date date to date date to date Unaudited Unaudited Unaudited Unaudited Component 1 - Rehabilitation and Improvement of Selected Secondary and Local Roads Civil works 10 193,527 14,013,267 10,193,527 14,013,267 - Land Cost 138,586 146,544 138,586 146,544 - Consultancy for supervision 1,192,935 1,194,422 1,192,935 1,194,422 - and design TOTAL COMPONENT 1 11,525,048 15,354,233 11,525,048 15,354,233 - - Component 2 - Institutional Strengthening Project Management - - - - - TOTAL COMPONENT 2 - - - TOTAL EXPENDITURES 11,525,048 15,354,233 11,525,048 15,354,233 - BY COMPONENTS UNALLOCATED Front end fees - 187,500 - 187,500 - TOTAL UNALLOCATED - 187,500 - 187,500 - EXPENDITURE TOTAL PROJECT 11,525,048 15,541,733 11,525,048 15,541,733 - EXPENDITURES The Project consists of the following main components: * Rehabilitation and improvement of about 200 kilometers of secondary and local roads, through the carrying out of works and the provision of goods and consultant's services. * Strengthen the capacity of the Road Department of the Ministry of Regional Development and Infrastructure of Georgia and Foreign Project Unit (FPU) in project management and implementation, identifying, developing and implementing road safety measures on secondary and local roads and carrying out impact evaluations. The categories of expenditures incurred are presented in line with the categories specified in the Agreement. Each component of the Project is further divided into four types of expenses for the SOE purposes civil works, goods, consultants' services and operating costs. 11 TRANSPORT REFORM AND REHABILITATION CENTER THIRD SECONDARY AND LOCAL ROADS PROJECT LOAN NO. 8402-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in US Dollars) 9. COMMITMENTS AND CONTINGENCIES Management is not aware of any commitments and contingencies which would have a material impact on this special purpose project financial statements as at 31 December 2015 for the year then ended. 10. GEORGIAN OPERATING ENVIRONMENT The Center's operations are located in Georgia. Consequently, the Center is exposed to the economic and financial markets of Georgia, which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in Georgia. The special purpose project financial statements reflect management's assessment of the impact of the Georgian operating environment on the operations of the Center. The future operating environment may differ from management's assessment. 11. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE There were no significant events subsequent to the balance sheet date. 12. APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS These special purpose project financial statements were authorized for issue by the management of the Center on 30 June 2016. 12